Thursday, June 30, 2011

What Catch Up Growth Under a Nominal GDP Level Target Looks Like

One more thing about Swedish monetary policy.  I showed in a previous post that the Swedes seem to be effectively targeting the level of nominal GDP.  A nice thing about level targeting is that it has "memory," that is monetary policy does not forget past deviations from its target and works in subsequent periods to make it up.  Thus, it requires higher-than-normal catch-up growth if its targeted nominal variable it undershoots its target and vice versa.  This catch-up growth can be seen for Sweden in the figure below which shows the year-on-year growth rates of nominal GDP:

The Swedes appear to be aiming for just under a 5% nominal GDP growth.  Starting in late 2008 and going into 2009, nominal spending collapses and contracts at about a 5% growth rate.  To make up for this loss in nominal spending, the Riksbank nudges up nominal GDP growth up to almost 10% in subsequent quarters.  Nominal GDP growth still remains elevated but now appears to be slowing down to its trend rate.  Contrast this path with that of the U.S. nominal GDP.  The U.S. also sees a sharp drop in nominal spending, but the Fed only allows it to return to its trend growth rate value of about 5%.  There is no catch-up growth in nominal spending.  Is it any wonder the U.S. economy remains sluggish?

Update:  To be clear, the Riksbank does not explicitly target the level of nominal GDP.  Effectively, though, it policies come out doing something close to what would be done under a nominal GDP level target.  Thus, we can look to Sweden to get an idea of what catch-up growth would look like under a nominal GDP level target. 


  1. Devid, I can´t agree totally, because, as we can learn in
    Riksbank has only one mandate: prices stability. And its objective is an inflation rate near 2% with an only one instrumental variable: the repo rate.
    In fact, Svensson explain very well haw th Riksbank use two orientative variable, a price indicator and a "Ressources Used indicator" (RU), with an ample criterium of flexibility.
    So, if the ex-post result is "as" it had followed a NGDP rule, that is a consequences, not a target.
    For me, is the demonstration that common sense and ample confidence of politicians in Central Bank can work very well.
    I think that in another political context, Bernanke would have been more decisive in the QE2.

  2. Luis:

    I don't disagree with you. I did say the Riksbank is effectively targeting a nominal GDP level target, which is to say that in practice it does something that comes out looking like NGDP target. I could have been a bit more guarded on my title, but the point is to show what would have to happen to NGDP growth to return it to trend.

  3. That´s right.
    In any case, I has been very surprised by the "open mind" with Riksbank operate.
    It has conserved quite a margin in relation to its followed objective, so it can justified during much time deviations of inflation in relation to... ¡future inflation!

  4. David
    In 1987-07 the US was not operating under any explicit target (there was a mandate) but in effect it operated as if it had a nominal level target path for nominal spending. And things worked fine (there was the "Great Moderation"). The fact is that countries that operated as if under a target nominal path - Sweden, Poland - have done much better than the others!

  5. I would love to see how real gdp of sweeden looks like moving along with nominal gdp, but it doesn't look Fred has updated sweeden's real GDP yet.

  6. If Sweden's central bank starts to tighten as Nominal GDP level targeting would imply, could unemployment continue to fall? Although 7.7% is a good improvement over the 9.1% high, it's still about 2% lower than it was in mid 2008 Has there been some big structural changes over the past 3 years in Sweeden that can account for the 2% difference?

  7. Same as before:

    So was most of the improvement about increasing net exports?

    What happens when most economies have too much debt problems and try to net export their way out of trouble at about the same time?

  8. Who needs catchup?

    Marcus Nunes addressed this here:

    If you correctly target NGDP you don't ever fall.

  9. Possibly the instrumental variable used by the Riksbank (Expected inflacion, Resources Used) are fine tuned to NGDP, but are not NGDP, what, in my opinion, proves that there are several ways to do tinhgs well.
    I´m not confident in only one variable, the approach must be flexible and conprehensive. And truly comunicated: the comunicaction policy of RB is quite open. Each members has the possibility of espeech out his own opinion on the deecision.

  10. David
    Let´s not forget Australia!

  11. Nice ideas. I learned about them from, a leading Czech trader company.

    See my comments about Sweden and GDP targeting, too.