Monday, November 12, 2012

John Taylor Tips His Hat To NGDP Targeting

John Taylor gave a recent talk at the Milton Friedman Centennial Celebration where he made some interesting points.  He makes the case that that monetary policy has been unpredictable and ad-hoc over the past few years, including some periods where monetary policy was too tight.  As a result, he believes a more systematic, rule-based approach to monetary policy would be beneficial to the recovery.  To this end, he tips his hat toward nominal GDP targeting in his discussion of what he thinks Milton Friedman would endorse:
Another question raised during the discussion at the centennial conference is “what about nominal GDP targeting?” In my view, Milton Friedman would have been positive about a proposal to keep nominal GDP growth stable, but would have wanted also to have a specific rule for the instruments of policy to achieve that target.
I agree. Friedman in this 2003 WSJ article indicates he might have liked a nominal GDP level target. As Michael Woodford notes, nominal GDP targeting can be thought as the heir to the Friedman monetary target rule once one acknowledges that velocity is not stable. The predictability, transparency, and certainty this rule would create would also make it appealing to Milton Friedman.  Here is how I explained this point before:
So yes, Milton Friedman did call for buying longer-term securities until a robust recovery takes hold... I suspect, however, that Friedman would have preferred that such a monetary stimulus program be done in a more systematic manner than that of announcing successive, politically costly rounds of QE.  Imagine how much easier all of this would have been had the Fed announced a level target from the start and said asset purchases will continue until the level target was hit.  There would have been no need to announce the large dollar size of the asset purchases up front that attracts so much criticism.  There would also have been no need to announce successive rounds of QE that make it appear the previous rounds did not work.  More importantly, it would have more firmly shaped nominal expectations in a manner conducive to economic recovery.  The question is what type of level target would Friedman have supported? 
I think the answer is clear.


  1. I was the student who asked the question Taylor refers to, about NGDP targeting! To be frank, I was surprised by Taylor's receptivity to the idea (though he argued the rule should be stated in terms of the instrument, rather than in terms of the goal variable), since I consider him the archetypal neo-Keynesian, stuck thinking solely within the paradigm of interest rates.

  2. Basil H, glad you asked him! Did anyone else have anything to say about it?

  3. The other responses weren't as substantive as Taylor's:

    Bob Lucas joked that the Fed should adopt it, since, if it did, UChicago would get some credit since Scott Sumner's a UChicago PhD. Allan Meltzer, as far as I can recall, didn't so much address NGDP targeting as he did just attack the Fed for being too discretionary. He actually became quite passionate in his criticism, saying that the Fed's large amount of discretionary power conflicts with the basic principles of a democracy.