Wednesday, June 15, 2011

A Note to FOMC Members

According to this Bloomberg article, you are seriously discussing the adoption of an explicit inflation target.  Let me remind you that a price level target is even better since it has "memory".  Let me also remind you that during the September, 2010 FOMC meeting you folks discussed the possibility of a nominal GDP level target. There is much to like about a nominal GDP level target--it improves upon a price level target in how it handles supply shocks--and I hope you seriously consider it too.  


  1. I like the idea of targeting an aggregate price level, although I question whether using quantities as the weights (as you do when targeting nominal GDP) is optimal. Surely you should put more weight on the prices of items that are a) more heavily used as intermediate goods; b) are in industries with infrequent price updates; etc.?

    Furthermore: There is a well-known problem with level targeting in that it suffers from time inconsistency. All inflation (or deflation) prior to the commitment date is disregarded, but future deviations from the target will be compensated for, thus providing an incentive to re-do the commitment later on. How would you solve this problem?

  2. Such an emotionless title to your post!

    How about "De profundis clamo ad te, domine."

  3. Is persistence a virtue? Because you have it.

  4. Anonymous #1:

    If we want to go down the path of targeting the stickiest prices, it is still possible to arrive at something like a nominal GDP target. For one can make a reasonable argument along these lines that nominal wages should be targeted and a nominal wage target is not that different from a nominal GDP per capita target.

    I actually like the idea of a nominal wage target, but as Scott Sumner notes it is politically infeasible. Thus, a practical solution is a nominal income or GDP target of some kind.

    Now let me throw a question back at you: aren't you concerned about the problems supply shocks would create for a price level target? For example, if a large negative supply shock hit the economy would you really want the Fed to tighten just preserve the price level path? Alternatively, if a large aggregate productivity shock hit the economy, it would most likely imply a higher natural interest rate and lower prices. If the Fed tried to stabilize the price level, it would require pushing the actual real interest rate below the natural rate and potential setting off an unsustainable boom. One of the key reasons I like a nominal GDP target is that the Fed would quit worrying about price level changes and focusing just stabilizing nominal spending or nominal income.

    Regarding your time inconsistency question, I just don't see it be very big problem in practice. The Fed is very concerned already about its reputation and it is hard to believe Bernanke and company would say "Ha ha, we fooled you." Moreover, time inconsistency problems exist for approaches other than level targeting as well. No rule is perfect.

  5. Lee,

    As a good friend once told me about pursuing a woman, if you are going to go down go down swinging. I take the same approach to nominal GDP targeting. It may never see the light of day, but at least I will go down swinging in my attempts to promote it.

  6. "As a good friend once told me about pursuing a woman, if you are going to go down go down swinging."

    Unfortunate, though, if you are reduced to swinging at a woman, that is :P

  7. When pursuing a woman, I go down bumbling.

    Hopefully, Dr. Beckworth will have better luck, both in amorous and policy causes!

  8. Lee and Benjamin,

    Obviously, the swinging while going down in my dating attempts was figurative. Fortunately, I found a lovely woman who agreed to marry me and end my losing streak!

  9. David,
    I'm not sure if this matters or not but I was looking over some early 80's history and found it interesting that Reagan's OMB basically submitted their own NGNP target as part of their economic policy proposal in 1980. I was wondering if you could comment on anything I missed in the post. Thanks.

  10. I should note that in the book I'm citing in the blog post above, Robert Hall has an essay calling for an NGNP level target. It was written in 1982, entitled "The Reagan Economic Plan."
    To quote Hall:
    "What we can promise through the use of a sensible long-run monetary policy keep nominal GNP growth at a reasonably high level, that is, not undergo a sharp recession, and yet, reduce this growth gradually to a non-inflationary level...We can get out of the box by announcing a nominal GNP target instead of a money growth target."