Another Nail in the Coffin

Ramesh Ponnuru and I have a new article in the National Review that places another nail in the coffin of flexible inflation targeting.  Here is the introduction:

Twice in the last century, economic turmoil revealed the failure of a monetary regime and forced the West to abandon it for another. During the Great Depression of the 1930s one country after another abandoned the gold standard — a decision vindicated when they recovered in the same order. The inflation of the late 1960s and 1970s, meanwhile, persuaded most of the developed world’s central bankers to quit trying to “fine-tune” the real growth rate of the economy and instead concentrate on achieving price stability. 

It is once again time for regime change. The crisis in Europe and our stagnation at home both have primarily monetary causes, and a solution will require a new approach to monetary policy that learns from both the successes and the failures of the past.

We make the case that the time has come for a nominal GDP (NGDP) level target to replace flexible inflation targeting in both the United States and Europe.  One advantage is the ability of a NGDP level target to firmly anchor nominal income expectations and thus keep current nominal spending stabilized.  This property would, among other things, prevent the looming debt-ceiling talks from creating the economic uncertainty it did last year.  Betsey Stevenson and Justin Wolfers are concerned the U.S. economy is even more vulnerable this year to politicized debt-talks.  They would not be if the Fed were following a NGDP level target.

It is time for monetary regime change.