Sunday, August 14, 2011

Clive Crook Says Fed Should Target Nominal GDP

The Financial Times (FT) is the one newspaper that has columnists who understand the virtues of nominal GDP targeting.  Samuel Brittan has been making the case for it over many years on the pages of the FT.  He did it most recently last year when he called for a rebranding of nominal GDP targeting so that it would be more easily understood by the public.  He suggested calling it something along the lines of  a total money spending objective.  Martin Wolf has also implicitly endorsed something like a nominal GDP target in his columns and has told me in an email exchange that he thinks it is a good idea.  Finally, Clive Crook has come out with a strong endorsement of nominal GDP targeting in his most recent column.  Here is an excerpt:
To make the case for new stimulus, the Fed needs better arguments. The past few weeks have settled, to my satisfaction at least, a long-running debate on this very topic. Rather than targeting inflation, central banks should keep nominal incomes growing on a pre-announced path: say 5 per cent a year. Nominal gross domestic product is the sum of inflation and growth in real output – and is the variable that monetary stimulus directly drives.

...The crucial point – how an increase in nominal GDP breaks down between output and inflation – is not something the Fed can determine, or should have to explain. There are pros and cons to this approach, but that is the decisive political virtue of casting the target this way.

When nominal GDP falls below track, monetary stimulus pushes it back. If inflation rises temporarily during catch-up, that is tolerated. In current conditions, this makes all the difference. The new GDP figures showed demand has fallen much further below trend than had been appreciated. With a nominal GDP target, that announcement would have led investors to expect new monetary stimulus.
 It is good to see these FT columnists supporting nominal GDP targeting.  Lest you think it is a pipe dream that the Fed will ever adopt a nominal GDP targeting rule, just remember that the FOMC talked about a  Nominal GDP level target back in its September, 2010 FOMC meeting.  Adopting a nominal GDP level target would also provide a nice way for Congress to narrow the Fed's mandate.

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