Sunday, May 8, 2011

Questions for Greg Mankiw

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 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?  These are not just academic questions.  First, money demand in the United States remains elevated and, as a result, nominal spending is anemic and below any reasonable trend.  A nominal GDP level target would empower the Fed to meaningfully address this problem while still keeping long-term nominal spending expectations stable.  Second, some in the U.S. Congress want to narrow the Fed's mandate.  Adopting a nominal GDP level target is a great way to do that, as I argue here.  It would be nice to hear Greg Mankiw's answers to these questions.

P.S. Just to be clear, I am a big fan of nominal GDP level targeting.


  1. David
    While Mankiw moves in the right direction, Taylor is dead set in bringing back his namesake rule and get on "with business as usual".

  2. I agree, but, why not a less volatile variable, as W/NGDP?