An Alternative to Raising the Inflation Target

Ramesh Ponnuru and I have a new article in the National Review where we make the case that a better alternative to a higher inflation target is a NGDP level target:

Does the U.S. economy need more inflation? A group of 22 progressive economists has written a letter to the Federal Reserve urging it to appoint a blue-ribbon commission to study whether the central bank should raise its target for inflation above its current 2 percent. Fed chairman Janet Yellen, in her press conference following the latest interest-rate increase, called it “one of the most important questions” facing the organization. The economists’ advice shouldn’t be rejected out of hand, but it should be rejected. They make some valid points in their diagnosis of the ills of the current monetary regime. But the Fed can and should address these problems without raising inflation...  

These arguments for a higher inflation target are reasonably strong if you accept the premise that keeping inflation stable should be the Fed’s principal task in the first place. There is, however, a superior alternative. That alternative would stabilize the growth of nominal spending: the total amount of dollars spent throughout the economy...  

This policy would capture the benefits of inflation targeting...A key difference between the two policies is that a nominal-spending target would allow inflation to fluctuate over the short term in response to movements in productivity. 

In general, a nominal GDP level target allows for more inflation flexibility than is currently seen in practice while keeping the growth path of nominal demand stable. This rule would also improve over  current approaches by better risk-sharing in the financial system, better aligning of the Fed's interest interest rate with the natural interest rate, and better maintenance of money neutrality. Finally, its an target that invokes the imagery of Chuch Norris and Jean-Claude Van Damme.