Bennett McCallum is one of the most accomplished monetary economists of the past few decades. He also happens to be a champion of nominal GDP targeting. In a paper he did late last year for the Shadow Open Market Committee he discusses some of the problems with inflation targeting. He notes that even if one takes inflation targeting to be of the Taylor Rule type--where there is both an inflation and output gap term--there are still problems with it:
I would myself argue that the most prominent form of a typical IT policy rule, as described above, has a weakness stemming from its inclusion of the output gap as a second target/indicator variable to respond to. In particular, measurement of the “gap” requires measurement of the “natural rate” of output; but the latter is an unobservable and unmeasured variable that is conceptually different for every different specification of price-adjustment behavior used in the adopted macro model. And the price-adjustment relationship is arguably the single weakest and most-disputed portion of any macro-econometric model! For this reason, among others, I have long believed that use of the change in aggregate nominal spending—i.e., the change in a refined version of nominal GDP—would represent a more sensible combination of inflation and real-variable measures than is provided by the two variables of the traditional IT rule.
I'm Japanese.
ReplyDeleteIn these tragic circumstances, we really need NGDP targeting (however, it is politically impossible) or at least taking care of NGDP expectations. Which indicators should we monitor without an NGDP futures market? How do you think?
Qchan: Jeezm if the BoJ doesn't engage in serious QE now, when will they?
ReplyDeleteBenjamin:The BOJ has already begun some action.
ReplyDeleteThe problem is, the govement doesn't understand importance of monetary policy. Some goveners are talking about "crisis-tax" without thinking about debt finance. Plus, the BOJ doesn't believe in effectiveness of QE.
Things are not going well.
John Taylor wrote a paper in 2006 absolutely gushing over the success of the BoJ's then QE program. You can find it on his webpage.
ReplyDeleteMy sincere best wishes to Japan.
I spoke with McCallum last October, but can't recall what he said about mt futures targeting idea. He's a very polite man, so I'm pretty sure he didn't say anything too negative. :)
ReplyDeleteDid you see Mankiw's recent mention on NGDP targeting?