Monday, April 11, 2011

Scott Sumner is Alive and Well

He returns in a Bloomberg news story that calls on the Bank of England to abandon inflation targeting:
The Bank of England should consider replacing its inflation-targeting regime with one focusing on nominal gross-domestic-product growth, U.S. economist Scott Sumner said.  Targeting nominal GDP growth, which is not adjusted for inflation, would clarify the bank’s mandate and lessen its reliance on unreliable price indicators, Sumner, an economics professor at Bentley University in Waltham, Massachusetts, said in a report published today[.]

[...]

Inflation is “measured inaccurately and doesn’t discriminate between demand versus supply shocks,” Sumner said in a telephone interview. “Inflation often changes with a lag and sometimes when you go into recession, it doesn’t change very easily, but nominal GDP growth falls very, very quickly, so it’ll give you a more timely signal stimulus is needed.”

The U.K. central bank should target annual nominal GDP growth of about 4 percent to 5 percent, Sumner said. This would also lead to a better coordination of monetary and fiscal policy, he said. The Office for Budget Responsibility, the British government’s fiscal watchdog, last month cut its forecast for 2011 economic growth to 1.7 percent from 2.1 percent. 

The U.K. government shouldn’t be in a position where it is “reluctant to cut the budget deficit because of fear of the effect on the recovery,” Sumner said. “With nominal GDP targeting, you have the assurance that any slowdown in nominal GDP due to budget tightening can be offset by monetary policy.”
This last point seems particularly relevant to the U.S. economy now.  Hopefully, any contractionary effect from the current budget deal will be offset by the Fed. It sure would be easier for the Fed to do so  if  it had a nominal GDP level target.  Just saying.

Update: Here is the paper by Scott Sumner that motivated the above Bloomberg story.

8 comments:

  1. David
    Coincidently this morning I posted an extended comment on S Williamson´s post "Core Inflation" and argued that from his discussion "IT can be bad for your health". He replied in my post that he never said IT was bad. I answered saying that he "implied" it was so!
    http://thefaintofheart.wordpress.com/2011/04/11/no-consensus-on-inflation/#comment-538

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  2. Here's a link to the paper, so everyone can read it...

    http://www.adamsmith.org/files/ASI_NGDP_WEB.pdf

    I commend you on the wonderful work you, David, and the other quasi-monetarists have done in recent years. You should be very proud. One day when you are old you will look back on all of this say that you made the world a better place.

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  3. Thanks Marcus for the kind words and the link. You are doing a fine job yourself with your blog. Keep it up.

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  4. JoeMac
    Don´t feel bad. I think David saw the "same intials" of our names and answered as one! the "kind words and the link" is directed to you.

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  5. Oops, I did read too fast. So thanks to JoeMac for the kind words and kudos to Marcus for his blog.

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  6. Excellent paper by Scott Sumner.

    I really envourage the NGDP crowd to get together and author a piece for the WSJ.

    They recently ran an op-ed in favor of the gold standard.

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  7. “With nominal GDP targeting, you have the assurance that any slowdown in nominal GDP due to budget tightening can be offset by monetary policy.”

    But a country can do that even if it doesn’t go for NGDP targeting, can’t it? Second, it strikes me monetary policy has already gone too far: e.g. quantitative easing has resulted in dollars fleeing the US in search of better yields around globe, much to the annoyance of some other countries.

    I don’t object to NGDP targeting. I just think NGDP targeting a la Sumner relies too much on monetary policy.

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  8. David,
    I thought I saw Scott on Main Street in Newark, Delaware this week. He was with Elvis and Jerry and they seemed to be having a good time.

    That is all.

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