Nominal Income Targeting or (More Economic) Bust!

Awhile back I made the case that the Fed could improve macroeconomic stability by adopting a nominal income targeting rule. Such a rule would (1) force the Fed to be more vigilant in stabilizing nominal spending while (2) allowing it to avoid the distraction of rigidly following inflation. Nominal spending shocks, after all, are the real source of macroeconomic volatility while inflation is merely a symptom of these shocks. Moreover, inflation can sometimes can be hard to interpret--Is the high(low) inflation due to positive(negative) aggregate demand shocks or negative(positive) aggregate supply shocks?--and as a result monetary policy that targets inflation may make the wrong call. For example, I noted the following scenario earlier:

Imagine the U.S. economy is buffeted with a series of positive productivity shocks that increases aggregate supply. This development would put downward pressure on the price level and set off the deflation red alert sign at the Federal Reserve. Now, in order to keep the price level from falling, the Federal Reserve must act to increase nominal spending. If this change in monetary policy were unexpected, or if there were significant nominal rigidities (i.e upward sloping Short-run aggregate supply curve), the nominal spending increase that stabilizes the price level would also push actual output beyond its natural rate level. Hence, there would be both a sustainable component—the productivity gains—and a non-sustainable component—the monetary stimulus—to the subsequent increase in real output. Moreover, the unsustainable pickup in actual output would occur without any alarming increases in the price level ... The increase in nominal spending could thus create a boom-bust cycle in real economic activity without any of the standard inflationary signs of overheating.

As I have argued elsewhere, I believe the above scenario is a good description of what happened in the U.S. from 2003-2005. But I digress; the key point is that monetary policy should aim to stabilize the cause of macroeconomic instability rather than a symptom of it.

Now some observers will reply that the Fed is not just focused on an inflation target, but also looks at the the output gap as is mandated by law. So in some sense, it may already be close to following a nominal income targeting rule. While there is some truth to this claim, there still appears to be an implicit inflation target for the Fed that implies when push comes to shove inflation worries will trump any concerns over full employment. The recent inflation hawk talk by Fed Chairman Ben Bernanke is a case in point; other examples include the deflation scares of 1998 and 2003.

Other observers will argue that even if one concedes the advantages of nominal income targeting there still is the difficulty of implementing it: how does one measure nominal income in real time? My answer is that there are monthly measures of real economic activity--coincident index or industrial production--that can be used in conjunction with a monthly price level measure to estimate current nominal income. At a minimum, there is no reason to believe that nominal income targeting would be any harder to implement than a monetary policy following a Taylor rule, which requires ones knows the hard-to-measure in real time output gap.

The importance of stabilizing nominal spending can be seen in the graph below that plots the relationship between the output gap and nominal spending shocks. The output gap is calculated as the percent difference between actual real GDP and the U.S. Congressional Budget Office’s potential real GDP. The nominal spending shocks series is calculated as the deviation of the year-on-year growth rate of quarterly final sales to domestic purchasers from its preceding 10-year moving average. The data cover the period 1953:Q1 - 2008:Q1.

The scatterplot makes it clear there is a strong, positive relationship between nominal spending shocks and the output gap. As a comparison, I have constructed in the same way an inflation shock series from the PCE price index and plotted it below against the output gap.

These figures indicate nominal spending shocks are more closely related to the output gap than inflation shocks. Given these results, I went ahead and plugged the nominal spending shock and output gap series into a vector autoregression (VAR) to get a sense of their dynamic relationship. Five lags were used in the VAR, which is enough to remove serial correlation from the quarterly data (data already in growth rates so no unit roots). After estimating the model and imposing recursive ordering to identify the structural shocks, I got the following impulse response function (IRF) for the output gap given a 1 standard deviation shock to nominal spending:

In plain English, the above figure shows that the typical shock to nominal spending leads to about a 0.5% increase in the output gap--a positive output gap--that persist for about a year and then begins unwinding. Another interesting exercise is to look at the decomposition of the forecast error from the VAR. This exercise explains how much of the forecast error can be attributed to a certain shock. (It tells us whether the interesting results from the IRF really matter)

Here we see that nominal spending shocks account for about 50% of output gap forecast error, a significant amount. By comparison, if the VAR is reestimated with the above inflation shock series instead of the nominal spending shock series, only about 8% of the forecast error can be explained by the inflation shock. Nominal spending shocks matter greatly!

Now I do want to oversell the findings presented here since they are based on a two variable VAR, but they are highly suggestive that nominal spending shocks are more important to macroeconomic stability than inflation shocks. Hence, monetary authorities should pay more attention to nominal spending. Moreover, stabilizing nominal spending should do better than inflation targeting at preventing the buildup of financial imbalances and asset bubbles for reasons explained here. In short, I am big believer that there would be meaningful gains in macroeconomic stability should the Fed should adopt a nominal income targeting rule.

Balance Sheet Recessions Are Really Nominal Income Recessions

I recently lamented the Fed's ongoing dereliction of duty as seen in the sustained declined of households' expected nominal income growth:

In that post, I noted this observed decline was problematic for two reasons: (1) current nominal spending decisions are influenced by expected nominal income growth and (2) past nominal debt contracts were based on certain expectations of nominal income growth that did not happen. Here is what I specifically said on the latter point:

The figure also indicates that real debt burdens are higher than many households expected prior to the crisis. Look at the dashed line. It shows the average expected dollar income growth rate over the 'Great Moderation' period was 5.3%. Now imagine it is early-to-mid 2000s and you are taking out a 30-year mortgage and determining how much debt you handle. An important factor in this calculation is your expected income growth over the next 30 years. If you were average, then according to this data you would be forecasting about 5% growth rate. But that did not happened. Household dollar incomes declined and are expected to remain low. Nominal debt, however, has not adjusted as quickly leaving higher than expected real debt burdens for households. 

An important implication of this development is that households' deleveraging over the past few years may not be so much about their weakened balance sheets as it is about the unexpected decline in their expected nominal income growth. Josh Hendrickson and I are working on a paper where we develop this point more fully and, among other things, report the figure below. It plots expected household nominal income growth against the percent change of nominal household debt:

This figure suggests that for households, expected dollar income growth matters a lot for deleveraging. It also implies "balance sheet recessions" are a byproduct of nominal income shortfalls. One policy implication, then, is that the Fed should have maintained aggregate nominal income growth at its expected path. It failed to do so in 2008 and has yet to fully make up for this shortfall.

I bring this up, because a new paper by Kevin D. Sheedy (hat tip Simon Wren-Lewis) shows that NGDP level targeting dominates inflation targeting for this very reason. It is much better at stabilizing the real debt burdens of households precisely because it is much better at stabilizing the growth path of nominal income. Here is his abstract:

Financial markets are incomplete, thus for many agents borrowing is possible only by accepting a financial contract that specifies a fixed repayment. However, the future income that will repay this debt is uncertain, so risk can be inefficiently distributed. This paper argues that a monetary policy of nominal GDP targeting can improve the functioning of incomplete financial markets when incomplete contracts are written in terms of money. By insulating agents' nominal incomes from aggregate real shocks, this policy effectively completes the market by stabilizing the ratio of debt to income. The paper argues that the objective of nominal GDP should receive substantial weight even in an environment with other frictions that have been used to justify a policy of strict inflation targeting.

Fed officials should take note. So should ECB officials since this finding is particularly poignant for the Eurozone. It is time to fully embrace NGDP level targeting.

A Great Blogginheads To Watch

I thoroughly enjoyed the discussion below between Mark Thoma and Scott Sumner. Listen to the entire file or use the below markers for specific topics:

Did anything in particular cause the financial crisis? (11:34)
What did the Fed do wrong? (18:30)
Mark defends government spending as economic stimulus (32:08)
Scott on why monetary policy should target nominal GDP (46:08)
The Geithner plan explained via used car lot (62:01)
Advice for financial regulators of the future (64:59)
Play entire diavlog (65:03)

Financial Pneumonia

A couple of comments.

First, I really liked Mark Thoma's take on what caused the financial crisis. While acknowledging the role the Fed played, he contends no one factor is entirely responsible for the current crisis. Rather, this economic debacle is the result of a perfect storm of developments coming together at just the right time. This is a view I have come to adopt--early on I tended to put too much emphasis on the Fed--in my thinking.

Second, I was really glad to see Mark and Scott discuss nominal income targeting as an alternative way to conduct monetary policy. This approach makes the most sense to me because it is capable of handling both aggregate demand and aggregate supply shocks--something that cannot be said for inflation targeting. As I noted earlier:

Such a [nominal income targeting] rule would (1) force the Fed to be more vigilant in stabilizing nominal spending while (2) allowing it to avoid the distraction of rigidly following inflation. Nominal spending shocks, after all, are the real source of macroeconomic volatility while inflation is merely a symptom of these shocks. Moreover, inflation can sometimes can be hard to interpret--Is the high(low) inflation due to positive(negative) aggregate demand shocks or negative(positive) aggregate supply shocks?--and as a result monetary policy that targets inflation may make the wrong call.

I would also note that one of the critiques of such a rule is that it would be difficult to implement in practice since GDP numbers come out so infrequently. My reply to this critique is that there are just as severe problems in implementing an inflation targeting rule like the Taylor rule. Here, ones needs to know the elusive output gap and the neutral interest rate. With a nominal income targeting rule, however, one could in principle use monthly indicators for nominal GDP--coincident indicator and CPI--to estimate the nominal GDP on a monthly basis. Moreover, Scott mentioned an even better solution: set up a futures market for nominal GDP. This would allow for a forward looking nominal income targeting rule.

Thanks Mark and Scott for a great discussion.

Update: here is a nice introductory article on nominal income targeting from the St. Louis Federal Reserve.

Ending the Bubble-Bust-Bailout Cycle

Writing in the New Republic, Simon Johnson and Peter Boone express grave concern that we have made it through this economic crisis only to be setting ourselves up for another one:

[T]he Fed may well have mitigated our current crisis by sowing the seeds for the next one... Our banks have gotten into the habit of needing to be rescued through repeated bailouts. During this crisis, Bernanke--while saving the financial system in the short term--has done nothing to break this long-term pattern; worse, he exacerbated it. As a result, unless real reform happens soon, we face the prospect of another bubble-bust-bailout cycle that will be even more dangerous than the one we’ve just been through.

Johonson and Boone argue that the next bubble-bust-bailout is just part of a pattern that the Fed has inadvertently played into since the 1970s:

Since the 1970s, successive financial crises have required ever more dramatic reactions from the Fed. Every time there is a potential financial meltdown, the Federal Open Market Committee quickly cuts short-term interest rates. These cuts have become larger and larger over time, now essentially taking interest rates to zero. Each round of interest-rate cuts has made sense when a given crisis breaks. But these cuts--which effectively function as bailouts for banks that have gotten into trouble--often helped bring about the next financial crisis. And the crises are getting larger, not smaller, over time.

They go on to document how every Fed chairman since the late 1970s, including the saintly Paul Volker, has been a contributor to this cycle. They also argue that the currently proposed reform of the financial system will not end this cycle:

In June 2009, Treasury Secretary Timothy Geithner unveiled the administration’s plans for reforming our financial sector and preventing a major crisis from happening again. The cornerstone of the proposal is to (slightly) reduce the number of agencies carrying out regulation, and to give new powers to the Fed.

Unfortunately, these changes are unlikely to work. They do not alter the enormous incentive our banks have to take excessive risks. They don’t address the fact that strong financial groups can lobby our lawmakers and beat down regulators until they are largely ineffective. And they don’t affect our propagation mechanism: The printing presses at the Fed remain open and available for when the next crash comes, and that makes creditors confident that they can lend without risk to our heavily leveraged financial sector. As long as this combination remains in place, today’s financial executives fully understand that the party goes on.

Their solution to ending this cycle is to sharply raise capital requirements at banks, make managers and boards of directors at financial institutions personally liable to some extent for their companies, regulate the revolving door between industry and government for financial regulators, and make the Fed more accountable for systemic financial risk.

While their solution list has merit, let me suggest a simple two-step reform package that I believe would end bubble-bust-cycle: (1) initiate a nominal income targeting rule for monetary policy and (2) adopt macroprudential policies. A nominal income targeting rule would helpful for several reasons. First, it would allow the Fed to see beyond the false comfort of maintaining low inflation. The Fed in in 2003-2005 allowed short-term interest rates to remain inordinately low and economic imbalances to grow because, among other things, inflation was reigned in. Had the Fed been looking at nominal income or spending growth, however, during this time it would been more concerned. (A key problem with an inflation focus for monetary policy is that it only works well with demand shocks. Nominal income targeting , on the other hand, handles both demand and supply shocks. See here for more.) Second, a nominal income targeting rule if strictly followed would help the Fed move away from making bailouts. By stabilizing nominal spending or nominal income, the Fed would minimize the booms, the bust, and thus the need for bailouts. While I believe a nominal income targeting rule would take us a long way in improving both macroeconomic and financial stability, it may not be enough given the political realities outlined above. Consequently, macroprudential regulations such as a countercyclical element to capital requirements would provide a nice complement. Together, these two polices should bring us closer to ending the financial bubble-bust-bailout cycle.

If Only the Fed Had Been Targeting Nominal Income

Over at Cato Unbound, Lawrence H. White explains the reason why the Federal Reserve's monetary policy was too accommodative in the early-to-mid 2000s was that if failed to stabilize nominal spending:

How do we judge whether the Fed expanded more than it should have? One venerable norm for making fiat central bank policy as neutral as possible toward the financial market is to aim for stability (zero growth) in the volume of nominal expenditure. [2] Second-best would be a predictably low and steady growth rate of nominal expenditure. A useful measure of nominal expenditure is the dollar volume of final sales to domestic purchasers (GDP less net exports and the change in business inventories). During the two years from the start of 2001 to the end of 2002, final sales to domestic purchasers grew at a compound annual rate of 3.6 percent. During 2003, the Fed’s acceleration of credit began to show up: the growth rate jumped to 6.5 percent. For the next two years, from the start 2004 to the end of 2005, the growth rate was even higher at 7.1 percent, nearly a doubling of the initial rate. It then backed off, to 4.3 percent per annum, from the start of 2006 to the start of 2008. But the damage from an unusually rapid expansion of nominal demand had been done.

A key implication is that had there been a nominal income targeting rule, monetary policy during this time would have been more stabilizing. I am a big fan of nominal income targeting and hope some day it becomes as popular as inflation targeting has been over the past few decades. For more discussion on why a nominal income targeting rule would have made a difference in the early-to-mid 2000s see my posts here and here. Also see this classic paper on nominal income targeting for a good overview.

A Dereliction of Duty

Market Monetarists have long made the case that a nominal GDP (NGDP) level target would firmly anchor the expected growth path of nominal income.  Doing so, in turn, would stabilize current nominal spending since households and firms are forward looking in their decision making.  For example, holding wealth constant, households generally will put off purchasing a new car or renovating their homes if they expect their nominal incomes to fall and vice versa.  This is why Scott Sumner likes to say monetary policy works with long and variable leads. This understanding implies, therefore, that the reason for nominal spending remaining below is its pre-crisis trend is that the Fed has failed to restore expected nominal income to its pre-crisis path. This failure amounts to a passive tightening of  monetary policy. 

In the past I provided some supporting evidence for this view using data from the Survey of Professional Forecasters.  Thanks to Evan Soltas, we now know of an another measure of expected nominal income growth that provides further evidence for the Market Monetarist view. The data comes from a question on the Thompson Reuters/University of Michigan Surveys of Consumer where households are asked how mcuh their nominal family income is expected to change over the next 12 months.  The figure below shows this measure up through October, 2011.  

Source: Thompson Reuters/University of Michigan

This figure shows that for most of the Great Moderation the Fed kept consumer nominal income expectations anchored around 5%.  That is a remarkable accomplishment.  But the figure also screams massive Fed failure.  It shows a decline in expected nominal income growth that gradually begins in late 2005 and sharply accelerates in 2008. This fall is unprecedented in the series.  What is even more troubling, though, is that expected nominal income growth has remained flat. The Fed has failed to restore expected nominal income growth back to normal levels. It should be no surprise, then, that households are deleveraging and holding an inordinate amount of liquidity in their portfolios.  

Source: Thompson Reuters/University of Michigan, New York Federal Reserve Bank

A recent study that makes use of this data has findings that reinforce the importance of stabilizing nominal income expectations.  Mariacristina De Nardi, Eric French, and David Benson of the Chicago Fed in paper titled "Consumption and the Great Recession" examine the importance of changes in expected nominal income and wealth for aggregate consumption. Among other things, they find that expected nominal income growth deteriorates across all age groups, educational levels, and income levels over the past few years.  This is not some sectoral-specific (i.e. structural) development.  They also find that the collapse in expected nominal income growth was an important determinant of the fall in aggregate consumption during the Great Recession.

This new data, the Chicago Fed study, and my previous post all indicate how important it is for the Fed to properly manage nominal income expectations.  By this criteria there has been a dereliction of duty by the Fed. It is time for the Fed to recognize its failures and adopt an approach that better anchors nominal income expectations.  It is time for the Fed to adopt a NGDP level target.

P.S. Maybe the Chicago Fed study had some influence in converting Chicago Fed President Charles Evans to a fan of NGDP level targeting. 

How the Fed Can Minimize Asset Bubbles

The Financial Times (FT) is reporting that the Federal Reserve is looking for new ways to fight the assets bubbles of the future. In addition to better prudential regulation, the Fed is even considering--gasp--using its policy rate to nip an asset bubble in the bud. If you have been following the debate of asset bubbles at the Fed you will know this is a radical departure from past thinking. In the words of the FT:

The US Federal Reserve is reconsidering the way it deals with asset price bubbles in the wake of the housing and credit bust, in a move that could see the central bank using regulation – or even interest rates – to fight unjustified increases.

[...]

One option would be for the Fed to tackle bubbles with monetary policy, setting interest rates higher than they would otherwise be when asset prices appear to be inflating beyond levels justified by economic fundamentals.

Mr Bernanke rejected this approach in 2002 but is willing to re-evaluate it in the light of recent events.

Better prudential regulation and a willingness to take into consideration the possibility of asset bubbles in the conduct of monetary policy is progress. The tricky part, though, is how to modify monetary policy so that is responds in a systematic way to asset bubbles. One approach would be to simply add asset prices to a Taylor rule. However, even in a forward-looking Taylor rule with asset prices, monetary policy would only be responding to an asset bubble after it had emerged, after the asset bubble horse is already out of the barn. (This is because asset bubbles--which by definition are not based on fundamentals--cannot be predicted.) Would it not better to have a rule that minimized the emergence of asset bubbles in the first place?

I believe a nominal income targeting rule is just such a rule. In fact, for some time I have argued here that monetary authorities may actually increase macroeconomic volatility by aiming to stabilize some form the price level (e.g. inflation targeting), rather than nominal income. My reasoning has been that changes in aggregate productivity that are offset by monetary authorities, so as to maintain price level stability, can lead to economic imbalances. For example, in this post I said the following:

Imagine the U.S. economy is buffeted with a series of positive productivity shocks that increases aggregate supply. This development would put downward pressure on the price level and set off the deflation red alert sign at the Federal Reserve. Now, in order to keep the price level from falling, the Federal Reserve must act to increase nominal spending. If this change in monetary policy were unexpected, or if there were significant nominal rigidities (i.e upward sloping Short-run aggregate supply curve), the nominal spending increase that stabilizes the price level would also push actual output beyond its natural rate level. Hence, there would be both a sustainable component—the productivity gains—and a non-sustainable component—the monetary stimulus—to the subsequent increase in real output. Moreover, the unsustainable pickup in actual output would occur without any alarming increases in the price level ... The increase in nominal spending could thus create a boom-bust cycle in real economic activity without any of the standard inflationary signs of overheating.

In this scenario, had monetary authorities stabilized nominal spending--allowed the price level to fall while output increased--there would have been no positive output gap. Consequently, it would have been better for monetary authorities to stabilize nominal spending through a nominal income targeting rule. Note, that this understanding would also have implications for interest rates:

These developments could also be viewed from an interest rate perspective. Here, the Wicksellian view that the actual real rate of interest can deviate from the natural rate of interest in the short run is invoked. The natural rate of interest is the real interest rate justified by non-monetary fundamentals, specifically the productivity of capital, the labor supply, and individuals’ time preferences and is the real interest rate consistent with the natural rate level of output. Recall that an increase in the growth rate of productivity should be matched by a similar increase in the natural rate of interest. If, however, monetary authorities attempt to offset the productivity-generated deflationary pressures by lowering the policy interest rate, they may force the actual real interest rate below the natural interest rate. This response can create an unsustainable credit boom. The resulting macroeconomic disequilibrium will be manifested in unwarranted capital accumulation, excessive leverage, speculative investments, and inordinate asset prices...

Here again, in this scenario--which sound eerily familiar to the U.S. economy during 2003-2005--had monetary authorities instead stabilized nominal spending the real rate of interest would not have fallen below the natural rate of interest. To the extent a nominal income monetary policy rule prevents an asset bubble from emerging in the first place, it would be better than a Taylor rule that responds after the asset bubble formed. So how about it Chairman Bernanke and other member of the Fed: what do you think about a nominal income targeting rule as means to minimizing asset bubbles?

Update: Take a look at this nominal income targeting rule.

A Brief Look at the Productivity Norm Rule

Mark Toma points us to knzn who is arguing the Fed should target unit labor costs. I am sympathetic to this view because it would mean--depending on how it was implemented--monetary policy would allow productivity-driven deflation. Currently, all deflationary pressures are banished by monetary authorities and I believe this approach--which fails to distinguish between aggregate demand-driven or malign deflation and aggregate supply or benign deflation--is destabilizing to the macroeconomy (see here and here for reasons why). In fact, I have argued that this one-size-fits-all approach to deflationary pressures contributed to the housing boom of 2003-2005.

What I have not done is spell out how one could systematically allow for benign deflationary pressures in monetary policy while correcting for malign deflationary pressures. That is why knzn's proposal is so interesting to me. His ideas line up nicely with George Selgin's work, which shows how to implement a monetary policy rule that allows for benign deflation. Selgin proposes a "Productivity Norm" rule that in one form would effectively stabilize the nominal wage but allow the price level to reflect changes in productivity.

There are actually two forms of his rule. Under the first one--the "Total Factor Productivity Norm" rule--Selgin would have monetary authorities target a nominal income growth rate equal to the expected growth rate of real factor inputs. Such a nominal income target would monetarily accommodate the real output effect of factor input growth, but not productivity growth and therefore allow the price level to inversely reflect both shocks to and anticipated changes in productivity. Under the second version--the "Labor Productivity Norm" rule-- Selgin would have nominal income growing at the expected growth rate of labor inputs. This monetary policy rule would still stabilize the nominal wage but lead to a slightly higher rate of deflation than the total factor productivity norm rule. These productivity norm rules, like other nominal income stabilizing rules, would also provide a natural offset against aggregate demand shocks, thus correcting for malign deflationary pressures.

The productivity norm rules are intended to improve macroeconomic stability by allowing for benign deflation. Why benign deflation is important to macroeconomic stability has been outlined in this blog (see above links), but to see Selgin's reasons look at his book "Less than Zero: the Case for a Falling Price Level in a Growing Economy" or this paper.

Below I have copied (with some slight adjustments) from Selgin's above book the appendix that outlines in a more formal way how the two productivity norm rules would appear in nominal income targeting rules.

"Let

(1) Py = wL+rK

represent an economy's nominal income, where P is the general price level, y is real output, w is the price of a unit of average-quality labor, r is the rental price of average-quality capital, L is labor input and K is capital input. Also, let

be the economy's productivion function, where A is a total factor productivity index and b is capital's share of total income, rK/Py, which is assumed to be constant (as is roughly the case in reality). The logarithmic differential of (2) with respect to time is:

(3) y = A + bK +(1-b)L,

where italics represent growth rates. A, then, is the growth rate of total factor productivity. Rearranging (3) gives

(4) y - L = A + b(K-L)

where y-L is the growth rate of labor productivity and (K-L) is the growth rate of the capital-labor ratio. A labor productivity norm requires that

(5) P = L - y

whereas a total factor productivity norm requires that P = -A or equivalently, (from equation 4) that

(6) P = -y + bK + (1-b)L

Equations (5) and (6) can be rearranged to give corresponding rules for nominal income growth. A labor productivity norm requires that

(7) P + y = L,

that is, that nominal income grow at the same rate as labor input; while a total factor productivity norm requires that

(8) P + y = bK + (1-b)L,

that is, that nominal income grow at a rate equal to a weighted average of the growth rates of labor and capital input.

Lastly, we can compare the behaviour of (constant-quality) money wages under the two regimes by taking the logarithmic differential of (1) and recalling that b=rK/Py = a constant:

(9) P + y = w + L.

By substituting (7) and (8), respectively into (9), and solving in each case for w, we find that, under a labor productivity norm,

w = 0

meaning that money wages are kept stable; whereas, under a total factor productivity norm,

w = b(K-L),

meaning that money wages rise as production becomes more capital intense."

Further Readings on Nominal Spending

Given all the interest my figures generated on stabilizing nominal spending as a policy goal, I thought I would follow up with a collection of links to my posts and others on this topic. Let me note up front that stabilizing nominal spending as goal is nothing new and has been promoted in the past by many prominent economists such as Greg Mankiw, Robert Hall, Bennett McCallum, and others in the form of a nominal income targeting rule. It is just that this current crisis has sparked a renewed interest in the idea, at least among some observers.

Here are some blog posts:
(1) Why Care About Nominal Spending?--David Beckworth
(2) More on the Importance of Nominal Spending Shocks--David Beckworth
(3) Why Nominal GDP Matters--Scott Sumner
(4) Recognizing the Nature of the Macro Problem in My Views on Money/Macro--Scott Sumner
(5) Why Current AD Depends on Expected Future AD--Nick Rowe

And here are some accessible academic articles:
(1) Understanding Nominal GDP Targeting--Michael Bradley and Dennis Jansen
(2) Nominal Income Targeting--Greg Mankiw and Robert Hall

There are many other academic articles on nominal income targeting but most are highly technical. If you know of any more introductory or survey-type articles on this topic please let me know.

More On the Importance of Nominal Spending Shocks

Scott Sumner has a new article that provides a nice follow up to my previous post where I argued that stabilizing nominal spending rather than inflation is the key to macroeconomic stability. Scott similarly argues that inflation targeting is a poor option for monetary policy compared to nominal income targeting. After reading his post, I was reminded of some quick and dirty empirical analysis I did on this blog that lends support to this view. Here is an excerpt:

The importance of stabilizing nominal spending can be seen in the graph below that plots the relationship between the output gap and nominal spending shocks. The output gap is calculated as the percent difference between actual real GDP and the U.S. Congressional Budget Office’s potential real GDP. The nominal spending shocks series is calculated as the deviation of the year-on-year growth rate of quarterly final sales to domestic purchasers from its preceding 10-year moving average. The data cover the period 1953:Q1 - 2008:Q1.

The scatterplot makes it clear there is a strong, positive relationship between nominal spending shocks and the output gap. As a comparison, I have constructed in the same way an inflation shock series from the PCE price index and plotted it below against the output gap.

These figures indicate nominal spending shocks are more closely related to the output gap than inflation shocks. Given these results, I went ahead and plugged the nominal spending shock and output gap series into a vector autoregression (VAR) to get a sense of their dynamic relationship. Five lags were used in the VAR, which is enough to remove serial correlation from the quarterly data (data already in growth rates so no unit roots). After estimating the model and imposing recursive ordering to identify the structural shocks, I got the following impulse response function (IRF) for the output gap given a 1 standard deviation shock to nominal spending:

In plain English, the above figure shows that the typical shock to nominal spending leads to about a 0.5 percentage point increase in the output gap--a positive output gap--that persist for about a year and then begins unwinding. Another interesting exercise is to look at the decomposition of the forecast error from the VAR. This exercise explains how much of the forecast error can be attributed to a certain shock. (It tells us whether the interesting results from the IRF really matter)

Here we see that nominal spending shocks account for about 50% of output gap forecast error, a significant amount. By comparison, if the VAR is reestimated with the above inflation shock series instead of the nominal spending shock series, only about 8% of the forecast error can be explained by the inflation shock. Nominal spending shocks matter greatly!

Now I do want to oversell the findings presented here since they are based on a two variable VAR, but they are highly suggestive that nominal spending shocks are more important to macroeconomic stability than inflation shocks. Hence, monetary authorities should pay more attention to nominal spending. Moreover, stabilizing nominal spending should do better than inflation targeting at preventing the buildup of financial imbalances and asset bubbles for reasons explained here. In short, I am big believer that there would be meaningful gains in macroeconomic stability should the Fed should adopt a nominal income targeting rule.

Here is the original post.

If Mitt Romney Becomes the Next President...

I hope he appoints Greg Mankiw as the next Fed chairman.  Here is a post from October, 2011 that explains why Mankiw would be a great choice:

Back in May, 2011 I wrote the following on my blog:

Greg Mankiw recently referred to a paper where he assess which inflation rate should be targeted by the central bank.  Here is his conclusion:

[A]central bank that wants to achieve maximum stability of economic activity should use a price index that gives substantial weight to the level of nominal wages. 

There are several good reasons laid out in the paper for targeting nominal wages.  Here I like to point out that stabilizing nominal wages is similar to stabilizing nominal income per capita.  It is not too much of a stretch to go from this to a nominal income or nominal GDP target.  In fact, Greg Mankiw and Robert Hall have a 1994 paper that sings the praises of a nominal GDP target, especially one that that targets the consensus forecast of the nominal GDP level. 

So where does Greg Mankiw stand today on nominal GDP level targeting?  If he still supports it, does he see the need to return nominal GDP back to its pre-crisis trend or at least higher than its current level?

Though I have never got a direct answer from Greg Mankiw, there is now enough circumstantial evidence to know his answers to my questions. First, he and coauthor Matthew Weinzierl have a recent Brookings Paper on the optimal stabilization policy.  They go through a menu of policy options, but reach this conclusion if monetary policy is not constrained:

The second level of the hierarchy applies when the short-term interest rate hits against the zero lower bound. In this case, unconventional monetary policy becomes the next policy instrument to be used to restore full employment. A reduction in long-term interest rates may be sufficient when a cut in the short-term interest rate is not. And an increase in the long-term nominal anchor is, in this model, always sufficient to put the economy back on track. This policy might be interpreted, for example, as the central bank targeting a higher level of nominal GDP growth.

In other words, monetary policy targeting a nominal GDP level is sufficient to bring the economy back to full employment.  That sounds like a rather favorable view of nominal GDP level targeting to me.   If that were not enough, Greg Mankiw today implicitly endorses nominal GDP level targeting by linking on his blog to the Goldman Sachs paper on nominal GDP level targeting.  I'd say Mankiw has answered my questions clearly.

Now Mankiw is not just a big-time academic economist at Harvard.  He is also an economic adviser to  Mitt Romney, the likely GOP candidate for president.  That means NGDP level targeting might eventually find its way into the White House.  There are good reasons for Republicans to endorse such an approach to monetary policy.  I hope Mitt Romney is hearing them.

We will have to wait another day to see if Greg Mankiw will get a chance to implement nominal GDP level targeting.  

Update: Here is Joe Weisenthal earlier this year talking about Greg Mankiw as Fed chair.

Greg Mankiw Answers My Questions

Back in May, 2011 I wrote the following on my blog:

Greg Mankiw recently referred to a paper where he assess which inflation rate should be targeted by the central bank.  Here is his conclusion:

[A]central bank that wants to achieve maximum stability of economic activity should use a price index that gives substantial weight to the level of nominal wages. 

There are several good reasons laid out in the paper for targeting nominal wages.  Here I like to point out that stabilizing nominal wages is similar to stabilizing nominal income per capita.  It is not too much of a stretch to go from this to a nominal income or nominal GDP target.  In fact, Greg Mankiw and Robert Hall have a 1994 paper that sings the praises of a nominal GDP target, especially one that that targets the consensus forecast of the nominal GDP level. 

So where does Greg Mankiw stand today on nominal GDP level targeting?  If he still supports it, does he see the need to return nominal GDP back to its pre-crisis trend or at least higher than its current level?

Though I have never got a direct answer from Greg Mankiw, there is now enough circumstantial evidence to know his answers to my questions. First, he and coauthor Matthew Weinzierl have a recent Brookings Paper on the optimal stabilization policy.  They go through a menu of policy options, but reach this conclusion if monetary policy is not constrained:

The second level of the hierarchy applies when the short-term interest rate hits against the zero lower bound. In this case, unconventional monetary policy becomes the next policy instrument to be used to restore full employment. A reduction in long-term interest rates may be sufficient when a cut in the short-term interest rate is not. And an increase in the long-term nominal anchor is, in this model, always sufficient to put the economy back on track. This policy might be interpreted, for example, as the central bank targeting a higher level of nominal GDP growth.

In other words, monetary policy targeting a nominal GDP level is sufficient to bring the economy back to full employment.  That sounds like a rather favorable view of nominal GDP level targeting to me.   If that were not enough, Greg Mankiw today implicitly endorses nominal GDP level targeting by linking on his blog to the Goldman Sachs paper on nominal GDP level targeting.  I'd say Mankiw has answered my questions clearly.

Now Mankiw is not just a big-time academic economist at Harvard.  He is also an economic adviser to  Mitt Romney, the likely GOP candidate for president.  That means NGDP level targeting might eventually find its way into the White House.  There are good reasons for Republicans to endorse such an approach to monetary policy.  I hope Mitt Romney is hearing them.

More NGDP Targeting Concerns: Gavyn Davies Edition

Gavyn Davies has a new column where he responds to Michael Woodford's call for a NGDP level target.  Davies is always a good read, but this time he raises some concerns about NGDP level targeting that are unwarranted.  He claims  that the Fed may be uncomfortable with a NGDP level target because it might unmoor inflation expectations, it might be seen as time-inconsistent with the Fed's long-run objectives, and finally it may be too late to return NGDP to its pre-crisis trend.  While understandable, the first two concerns are without merit under NGDP level targeting.  This approach to monetary policy actually anchors long-run inflation expectations and provides a credible way to commit.  The last concern has more merit, but even here it is not a clear-cut case. Let's look at each of these concerns in turn.

Will Australia Be the First Country to Try NGDPLT?

There is a new Brookings paper by Warwick J. McKibbin and Augustus J. Panton titled Twenty-five Years of InflationTargeting in Australia: Are There Better Alternatives for the Next 25Years? Here is how they answer the question in their title:

This paper surveys alternative monetary frameworks and evaluates whether the current inflation targeting framework followed by the RBA for the past 25 years is likely to be the most appropriate framework for the next 25 years. While flexible inflation targeting has appeared to work well in Australia in the past decades, the nature of future shocks suggests that some form of nominal income targeting is worth considering as an evolutionary change in Australia’s framework for monetary policy.

Put differently, this Brookings paper argues that inflation targeting is a monetary regime whose time has come and gone. I completely agree. 

What is interesting, though, is that they are making this case for Australia whose economy has had a remarkable 27-year expansion. This is attributable, in part, to the Reserve Bank of Australia (RBA) who has successfully navigated through numerous shocks including the bursting of the tech bubble, the global financial crisis, commodity price collapse, and periodic bouts of China panic. The last time there was a recession in Australia it was in the early 1990s.

Along these lines, it is worth highlighting again that Australia, if any country, should have experienced a so-called 'balance sheet' recession in 2008-2009. It had a housing boom and a surge in household debt that exceeded the United States as seen below. It also faced a large negative commodity price shock in late 2008-early 2009. And yet there was no Great Recession in Australia. 

Australia, in short, was the balance sheet recession that never happened. The reason the Australian economy faired so well is because is because the RBA never hit the ZLB and, in so doing, kept aggregate nominal income on it trend growth path. Thus, there was less financial stress created for nominal debt contracts holders. So, unlike the Fed and the ECB, the RBA saw its nominal GDP stay roughly on course during and right after the global financial crisis. And that made all the difference in the world.

This gets us back to the new Brookings paper. So why do the authors argue for an explicit nominal GDP level target (NGDPLT) when the RBA's inflation target has been implicitly doing the same? The authors argue that going forward the biggest shocks likely to hit the Australian economy will be large supply shocks:

There are three main areas where future shocks can be anticipated. The first is climate change and climate policy responses. The second is the emergence of a fourth industrial revolution or a new Renaissance due to the rapid adoption of new technologies such as artificial intelligence. The third is the growth of larger emerging economies into the world economy following the experience of China.

The authors note an explicit NGDPLT is better suited to handle such shocks and thus their call for the RBA to adopt it. I agree completely on the supply shock motivation. I would, however, submit another reason for the RBA to explicitly adopt a NGDPLT in Australia. 

The RBA in the past has done a great job keeping nominal income on its trend growth path. However, in recent years it has actually slipped a bit and now it is now below trend. An flexible inflation target, apparently, is not enough to always keep aggregate demand growth stable. Moving to an explicit NGDPLT would put the focus on this emerging gap and force the RBA to take corrective actions. 

New Zealand was the first country to adopt inflation targeting. It was the avant-garde of this new monetary regime in the early 1990s. So maybe a smaller economy like Australia needs to do  same with NGDPLT before other larger economies try it. Here is hoping the RBA is willing to try it. 

New Paper on Nominal Income Targeting and the Great Moderation

In a previous post I showed graphically how one could view the history of U.S. monetary policy through the changing trends in the growth rate of nominal spending. One of the striking features from this figure was the stabilization of the nominal spending growth rate around 5% during the Great Moderation period. This figure, therefore, indicates the Fed may have had an implicit nominal spending or nominal income target of 5% during this time. That interpretation is now confirmed in a new paper by fellow blogger Josh Hendrickson:

An Overhaul of Fed Doctrine: Nominal Income and the Great Moderation

Abstract: The Great Moderation is often characterized by the decline in the variability of output and inflation from earlier periods. While a multitude of explanations for the Great Moderation exist, notable research has focused on the role of monetary policy. Specifically, early evidence suggested that the increased stability has been associated with monetary policy that responded much more strongly to rising inflation. Recent evidence casts doubt on this change in monetary policy. An alternative hypothesis is that the change in monetary policy was the result of a change in doctrine; specifically the rejection of the view that inflation was largely a cost-push phenomenon. As a result, this alternative hypothesis suggests that the change in monetary policy beginning in 1979 is reflected in the Federal Reserve's response to movements in nominal income rather than inflation as previously argued. I provide evidence for this hypothesis by estimating the parameters of a monetary policy rule in which policy adjusts to forecasts of nominal GDP for the pre- and post-Volcker eras. Finally, I embed the rule in two dynamic stochastic general equilibrium models with gradual price adjustment to determine whether the overhaul of doctrine can explain the reduction in the volatility of inflation and the output gap.

Take a look at this important paper. I believe targeting nominal spending would go a long way in shoring up macroeconomic stability and hope that one day it is explicitly adopted as the policy goal for the Fed.

A Risk Sharing View of Monetary Policy

I have a new working paper titled "Better Risk Sharing Through Monetary Policy? The Financial Stability Case for a Nominal GDP Target". I presented this paper at the recent Cato Monetary Policy Conference. Here is the abstract:

A series of papers have shown that a monetary regime targeting nominal GDP (NGDP)

can reproduce the distribution of risk that would exist if there were widespread use of state contingentdebt securities (Koenig, 2013; Sheedy, 2014; Azariadis et al., 2016, Bullard and DiCecia, 2018). This paper empirically evaluates this view by exploiting an implication of the theory: those countries whose NGDP stayed closest to its expected pre-crisis growth path during the crisis should have experienced the least financial instability. This paper constructs an NGDP gap measure for 21 advanced economies that is used to test this implication. The results strongly suggest that there is a meaningful role for NGDP in promoting financial and economic stability.

And an excerpt:

The key insight of Koenig (2013), Sheedy (2014), Azariadis et al. (2016), and Bullard and DiCecia (2018) is that in a world of incomplete markets where there is non-state contingent nominal contracting, an NGDP target can reproduce the risk distribution that would occur if there were complete markets and state contingent nominal debt contracting. An NGDP target, in other words, can make up for the lack of insurance against future risks that could affect debtors’ ability to repay their debt. Conversely, an NGDP target can also make up for the lack of insurance against potential returns a creditor might miss out on because their funds are locked up in a fixed-price nominal loan. Bullard and Dicecia (2018) show that this result holds even when the heterogeneity among debtors and creditors modeled approximates that of the actual income, financial wealth, and consumption inequality in the United States. They note this makes NGDP targeting “monetary policy for the masses.” 

This paper uses what I call a 'sticky-forecast' of NGDP as a benchmark path. Here is the intuition for the measure:

The idea behind the sticky forecast path for NGDP is twofold. First, the public makes many economic decisions based on a forecast of their nominal incomes. For example, households may take out a 30-year mortgage based on an implicit forecast of their nominal income over this horizon. The actual realization of nominal income may turn out to be very different than expected, but the households may not be able to quickly adjust their plans given sticky debt contracts and other commitments that constrain them. Therefore, the consequences of previous forecasts are often binding on them and slow to change even if their nominal income forecasts have been updated. Second, in addition to these old forecasts and decisions whose influence lingers, new forecasts and new decisions are being made each quarter for subsequent periods that will also have lingering effects. Together, this means future periods have many overlapping and different forecast applied to them that only gradually adjust.

The sticky-forecast path of NGDP can be viewed, in other words, as the neutral level of NGDP given the public's expectations of nominal income leading up to each period. The gap between it and actual NGDP is the "NGDP gap" and provides a measure of the stance of monetary policy.

Here is a note that further explains its construction for the United States using quarterly data from the Survey of Professional Forecasters. The note also shows how the sticky-forecast measure can be used as cross-check on the stance of U.S. monetary policy. The figures below illustrate its use. The first figure shows the sticky-forecast path of NGDP along with the actual NGDP series.

This next figure show the NGDP Gap, the percent deviation between these two series. As noted above, this can seen as the stance of monetary policy. Interestingly, it provides results very similar to Taylor rules. The NGDP Gap indicates that currently the monetary conditions are still a bit tight, but close to neutral. 

The Godfather Speaks

The Godfather of nominal GDP targeting has spoken.  Bennett McCallum, who has authored numerous academic papers on nominal GDP target and is probably the foremost expert on it, weighs in on the growing attention being given to this approach to monetary policy.  An important point that he makes is that a nominal GDP target would be easier to understand by the public than an inflation target:

It seems ironic then that, when academic economists suggested nominal income targeting to Federal Reserve officials in the 1980s, often the main objection put forth was that it would be difficult for the public to understand. But it seems likely that it would be easier for the public to understand nominal GDP growth than a target that includes an unspecified weighted average of an inflation rate and some unreported major adjustment to take account of output and/or unemployment conditions. Indeed, I would argue that “total spending” in the economy is a way of describing nominal GDP that would make that concept at least as easy to understand by average citizens as “core inflation” or even CPI inflation.

I have always believed that marketing a nominal GDP target would be fairly easy for the reasons laid out above.  Another way of framing this for the public is to say that the objective of such an approach to monetary policy would be to stabilize nominal income or wage growth (though technically that would require a nominal GDP per capita target).  The public understands their current dollar wages far better than the various CPI measures.   Thus, selling a NGDP target as a way to stabilize wage growth should have broad appeal.  And then there are good macroeconomic reasons to stabilizing nominal wage growth, but that is a topic for another post.

PS.  Lars Chrisentensen prefers to call Bennett McCallum the grandfather of Market Monetarism.  Meanwhile, Steve Randy Waldman and Kevin Drum say favorable things about nominal GDP targeting.

NGDP Targeting in the United Kingdom

Something interesting is happening in the United Kingdom. Some government officials there are pushing for the Bank of England to adopt an NGDP target. From the Independent:

Officials in the UK Treasury are “probably” considering whether to change the Bank of England’s inflation-targeting mandate due to the massive economic shock imparted by the coronavirus crisis, according to a former minister.

 Lord Jim O’Neill, who was commercial secretary to the Treasury in 2015, wants the central bank to shift from its current target of keeping inflation at 2 per cent to targeting a steadily rising trend of nominal UK GDP growth instead.

Since the U.K. Treasury determines the monetary policy target for the Bank of England, these rumblings are more than noise. The U.K. Treasury's increased interest in an NGDP target is driven, in part, by the efforts of Jim O'Neil. He has written articles, done interviews, and made a forceful case for this approach to monetary policy. Another prominent voice is Sajid Javid who was recently the Chancellor of the Exchequer. He also has called for NGDP targeting in a new study. They are not alone, as other members of Parliament also talking about an NGDP target and several UK think tanks are promoting it as well. There seems to be, in short, some real momentum for NGDP targeting in the Boris Johnson government.

If the Bank of England were to get an NGDP target, it would be the first central bank to explicitly do so. The Bank of England was an early adopter of inflation targeting, so it would be fitting for it also to be an early adopter of NGDP targeting. Moreover, moving to this monetary policy framework should not be too hard for the British central bank since it already does something that looks a lot like an NGDP target.

Still, this would be seen as a big change for the central bank and many observers are unsettled by its prospects. Again, from the Independent: 

Lord O’Neill conceded that the idea of moving to nominal GDP targeting would  “scare” many people in the Treasury and the Bank who regard the current inflation-targeting regime as a proven success.

To those observers who are worried, I would encourage you to check out my paper from late last year that summarizes the facts and fears of NGDP targeting. It was written with the Fed in mind, but its lessons are applicable to any central bank. Here, I want to make three points that are specifically directed toward the Bank of England adopting an NGDP target.   

Changes in Potential Real GDP: Much Ado About Nothing

My first point is that changes in potential real GDP should not be a practical concern if the Bank of England were to adopt an NGDP target. Changes to potential real GDP is a common objection to NGDP targeting and in principle a legitimate concern. In practice, however, the magnitudes involved make this a moot concern. 

To illustrate this point, imagine that the Bank of England had been credibly targeting NGDP at 4% a year since the mid-1960s. Also assume that the potential real GDP (y*) evolved as it actually did over this period. The difference between this imagined NGDP target and the actual growth rate of y*, would be the counterfactual trend inflation experienced during this time. The figure below shows the outcome. It reveals that trend inflation in the UK would have ranged from about 1% to 3%. The average inflation rate over the whole period would have been just under 2%. Not a lot to see here. Even if we tweaked the NGDP target up a bit, there would still no runaway inflation. Instead, we end up in a world with longrun inflation well-anchored and a stable growth path for nominal income. 

Now to the extent that changes in potential real GDP do matter, it actually favors NGDP targeting over flexible inflation targeting (FIT). Josh Hendrickson and I show this outcome in a JMCB paper (ungated version) last year. The punchline is that a central bank doing FIT needs to know both potential real GDP (y*) and real GDP (y) in realtime to avoid making mistakes. A central bank doing NGDP targeting does not need to know y* or y in realtime. In fact, it intentionally remains agnostic about them over the shortrun and simply aims to stabilize nominal income. As a result, it is less likely to accidentally make matters worse. This is not just a theoretical argument. Athanasios Orphanides, for example, shows that one reason for the Fed's tepid response to rising inflation in the in the 1970s was bad realtime data on the output gap. In more recent times, one see the Fed's talking up of rate hikes in the fist half of 2008 or the ECB's outright tightening of policy in 2008 and 2011 as manifestations of this problem. 

Concerns about changes in potential real GDP, then, are much ado about nothing under an NGDP target and only meaningfully matter for a FIT. 

NGDP Targeting Would Not Be a Radical Change 

My second point is that the Bank of England adopting an NGDP target would not be a radical change. For it is already producing outcomes that closely mimic an NGDP target. This can be seen in the figure below.

This chart shows that prior to the COVID-19 crisis, the Bank of England had grown NGDP about 4% a year along a stable path. This is exactly what an NGDP level target would look like. Interestingly, former Governor Mark Carney actually wanted the Bank of England to follow an NGDP target when he first arrived. The idea was quickly shot down, but nonetheless he got the outcome he was calling for back in 2012. It is almost as if the Bank of England had a stealth NGDP target under his stewardship. 

Prior to the Great Recession, NGDP was also on a relatively stable path, though during this time it was growing closer to 5%. This too looks similar to an NGDP level target. Both of these NGDP targeting-like experiences, however, end in a sustained trend path drop that is not made up. In other words, the Bank of England's implicit NGDP target is actually a version of a growth rate target rather than a level target. And that is where the recent calls for an NGDP level target are different from what the central bank has been doing.

The Real Change Would Be an Explicit Make-Up Policy

My final point is that the real change being called for is the adoption of a level target. That is, the goal is to move the Bank of England from an implicit NGDP growth rate target to an explicit NGDP level target. This would require the central bank to make up for past misses from its target. Put differently, an NGDP level target would empower the central bank to temporarily run the economy hot until NGDP got back up to its trend growth path. In the case of the United Kingdom, that means growing NGDP faster than the trend 4% growth rate. This faster-than-normal catch-up growth is sometimes called 'make-up' policy and is illustrated below: 

What an NGDP Level Target Might Look Like in the United Kingdom

If the UK Treasury were to announce an NGDP level target for the Bank of England, it could be as simple as restoring NGDP to its trend growth path that existed under Mark Carney. That is, temporarily run NGDP hot to make up for shortfalls below its trend path that occurred during the COVID-19 crisis. After that, simply grow NGDP at 4%. As seen in the first figure, a 4% level target would probably be fine given likely changes in potential real GDP in the United Kingdom. More complicated versions of an NGDP level target are possible, but I would start simple.

In closing, it is worth noting that NGDP targeting is not a new idea. It was highly talked about in the 1980s, but gave way to inflation targeting in the 1990s. The United Kingdom's adoption of an NGDP level target would simply put monetary policy in advanced economies back on its original journey. Bon voyage to the Bank of England!

Related Links

The Financial Stability Case for NGDP Targeting

NGDP Targeting in the United Kingdom - Scott Sumner