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A bit more on NGDP targeting

In my previous post I was perhaps not clear enough in explaining my main criticism of nominal GDP targeting. I would have no criticism of a private issuer trying nominal GDP targeting. If somebody wanted to issue "NGDP Bitcoin," for instance, that would be dandy. I would welcome a level playing field with issuers experimenting with various standards, say nominal GDP targeting versus inflation targeting versus a gold standard versus a frozen stock of the current monetary base versus whatever else people wanted to try.

As I explained, in principle I think that nominal GDP targeting is a better policy for a central bank than inflation targeting. Even so, it  has the flaw, common to all policies by central banks, that it is a centrally planned course of action rather than one that has to gain acceptance without privilege. Historical experience with monetary standards, as I interpret it, has been that a standard need only be good enough, not nearly perfect, to be durable, and nominal GDP targeting, once instituted, might beat all rival standards even if all barriers to competing against the central bank are removed. Nominal GDP targeting by a central bank might be 90 percent as good as a free banking system where the monetary standard exists only by mercantile custom and not by government promulgation. Without competition, though, we won't really know if the figure is 90 percent or only 40 percent.

Another point that is important to keep in mind about nominal GDP targeting is that, as George Selgin remarked to me, there is a difference between nominal GDP targeting as a monetary regime and as a mere policy. Establishing nominal GDP as a durable monetary regime requires establishing procedures to ensure that it remains in place even if central bank personnel change and that some penalty exist if the central bank repeatedly is far off target. If nominal GDP targeting is merely a policy, which the central bank is able to start and stop simply by a vote of its governing board, it may not have the same credibility and may not work the same as if it is a monetary regime. The public, though, and even most economists are not accustomed to drawing such distinctions. Instances where nominal GDP targeting worked poorly because central banks bungled it might have the same effect on the reputation of nominal GDP targeting that central bank bungling during the Great Depression had on the gold standard.

On another note, here is an amusing story of a reporter who tried to use only Bitcoin for a week.

  • Lio

    NGDP targeting vs inflation targeting: what garantee against inflation and bubbles? I see NGDP targeting, compared to inflation targeting, as a synonym of not less but more inflation and bubbles! Am I wrong?

  • Aaron Moser
  • Kurt Schuler

    Yes, you are wrong. First, as with an inflation target, an NGDP target can be chosen to be low or high. A low target results in lower average inflation. Second, if you are worried about inflation in the current context, as your comment seems to imply, that is bizarre, given that the Federal Reserve, the European Central Bank, and the Bank of Japan are all below their inflation targets. Third, compare an NGDP target with an inflation target that produces the same average inflation over a business cycle. Inflation targeting in practice is often procyclical, that is, central banks let inflation rise to the top of the target range or above during booms and fall to the bottom of the target range or below during busts. Under NGDP targeting, inflation is lower during the boom and higher during the bust, so countercyclical and therefore less likely to produce bubbles.

  • Lio

    Thank you for taking the time to answer me. However, I am not very convinced by your demonstration. It all depends on how inflation is defined or measured (just CPI or CPI extended + other assets or simply quantity of money) and especially how the central bank manages it (the same with NGDP). This is all very theoretical and I fear that inflation and bubbles (or other problems caused by excessive growth rates of the money supply) completely escape those who claim to want to regulate it.

  • Doesn't NGDP targeting assume a minimum high level of independence between the process monetary easing and subsequent real GDP?

    That is, if the process of monetary easing decreases real GDP and does so at a rate greater than it increases the inflator, couldn't a positive feedback loop develop that results in continuously declining NGDP driving the real GDP to zero (or at least permanently suppressing it with perpetual high levels of easing)?

    Maybe the assumption of independence is justified in normal times, but in times of severe drops in economic output, or rather in times of aggressive monetary easing, it seems that assumption would become less true.