In this paper i provide an analysis of this assumption. Minutes of the federal open market committee december 12, 2017. Today i will look at ngdp targeting as optimal monetary policy in a different type of model. The use of a monetary aggregate to target nominal gdp. Louis riccardo dicecio, federal reserve bank of st. Nominal gdp targeting and the monetary policy framework. The loss function values indicate that nominal gdp targeting produces noticeably lower losses in the. The literature on policy credibility and time consistency was explored in depth, along with insights from writings on corporate governance. A new keynesian model we employ a standard new keynesian model as the analytical framework. A policy conference policy panel on monetary strategies in practice hoover institution, stanford university. Nominal income aggregates that can serve as targets include nominal gross domestic product ngdp and nominal gross domestic income gdi. The arguments in favor of nominal gdp or pricelevel targeting and the cited studies about multiple equilibrium under a taylor rule are both. Recent papers by sheedy 2014, koenig 20, and azariadis, bullard, singh and suda 2016, hereafter abss, provide analyses of optimal monetary pol icy in economies where the key friction is in the credit market in the form of nonstate contingent nominal contracting nscnc. Scott sumner, bentley university, explains what nominal gdp targeting entails, and suggests that inflation targets do not prevent booms and busts in the credit markets.
Desirability of nominal gdp targeting under adaptive. Nominal gdp targeting as optimal monetary policy for the masses. Barnett, marcelle chauvet, danilo leivaleon, and liting su johns hopkins institute for applied economics, global health, and study of business enterprise studies in applied economics sae. For example, targeting the level of nominal gdp to be on a path rising by 4 percent per year would be consistent with 2 percent inflation and 2 percent potential growth. The key difference between gdp nominal and gdp ppp is that gdp nominal is the gdp unadjusted for the effects of inflation and is at current market prices whereas gdp ppp is the gdp converted to us dollars using purchasing power parity rates and divided by total population. The recent revival of interest in nominal gdp ngdp targeting has come in the context of large advanced economies. The rst concerns the general merits of nominal income targeting. Early suggestions of the possible use of monetary aggregates in nominal gdp targeting include feldstein and stock 1993, who showed that the relation between. This paper attempts to address this interest by summarizing basic facts of. Of course, nominal gdp comprises real gdp and inflation, so this framework explicitly incorporates both parts of the feds mandate.
A working solution to the question of nominal gdp targeting. These approaches have a number of potential advantages over standard inflation targeting. The revival of interest in nominal gdp ngdp targeting has come in the context of large advanced. Nominal gdp targeting for developing countries pranjul bhandari and jeffrey frankel harvard kennedy school jan. Take an indicative rate of real gdp growth its longrun trend or potential. Nominal gdp targeting for dummies adam smith institute. In the case of inflation targeting it, by contrast, the full impact of an adverse supply shock or terms of trade shock is felt as a loss in real gdp alone. This interestratetargeting regime, sometimes compared to economist john taylors famous policy rule, worked rel. Is nominal gdp targeting a rule policymakers could accept. Nominal gdp targeting is just another red herring to divide conservative monetary consensus nathan lewis contributor opinions expressed by forbes contributors are their own. We also compare key properties of nominal gdp targeting to pricelevel andalsotoin.
On the e ciency of nominal gdp targeting in a large open. These results indicate that nominal gdp level targeting might be worth considering as an alternative framework for monetary policy. Nominal gdp vs real gdp difference and comparison diffen. Such an approach has been advocated by belongia and ireland 2015, while a new keynesian approach has been proposed by the same authors in belongia and ireland 2014. Can nominal gdp targeting rules stabilize the economy. Nominal gdp targeting for developing countries harvard university. In virtually all cases for both models, output gap targeting does best, although nominal gdp targeting is a close second in most cases. The result also implies that these two policy regimes are superior to in. Nominal gdp targeting as optimal monetary policy for the. Louis, riccardo dicecio, federal reserve bank of st. Koenig vice president and senior policy advisor federal reserve bank of dallas the classic taylor rule for adjusting the stance of monetary policy is formally a special case of nominalgrossdomesticproduct gdp targeting. Patrick sullivan directed me to a post that is mildly critical of ngdp level targeting, by stephen cecchetti and kermit schoenholtz.
These comparisons are made on the basis of welfare losses relative to a. Historydependence is a key feature of nominal income and pricelevel targeting as it can provide more guidance to the economy than inflation targeting. Mercatus policy primer, mercatus center at george mason university, arlington, va, 2018. Real versus nominal gdp inflation can distort economic variables like gdp, so we have two versions of gdp. Interest in nominal gdp ngdp targeting has come in the context of large advanced economies. The large gap highlights an important aspect of nominal gdp targeting. The close connection between nominalgdp targeting and the taylor rule evan f. Written for a broad audience of laymen and students, the mises daily features a wide variety of topics including everything from the history of the state, to international trade, to drug prohibition, and business cycles. On the desirability of nominal gdp targeting, journal of economic dynamics and control, elsevier, vol. It is the aggregate monetary value of the economic output produced during a particular financial year, within the nations border. Real gdp values output using the prices of a base year. The case for nominal gdp targeting mercatus center. The classic taylor rule for adjusting the stance of monetary policy is formally a special case of nominal grossdomesticproduct gdp targeting.
The history of central banking is a story of one failure after another. In addition, nominal gdp is a less volatile aggregate than the consumer price index and the level of nominal gdp is the relevant indicator for assessing the sustainability of debt. Nominal gdp targeting for developing countries nber. Jun 19, 2012 the current economic crisis has called into question the role of monetary policy, particularly inflation targeting and its oversight of asset bubbles and supply side shocks. Nominal gdp targeting with heterogeneous labor supply james bullard aarti singhy this version. Nominal gdp targeting as optimal monetary policy for the masses author james bullard, federal reserve bank of st. Policy primer, mercatus center at george mason university, arlington, va.
Nominal gdp targeting as optimal monetary policy for the masses james bullard, federal reserve bank of st. Such targets are adopted by central banks to manage national economic activity. Targeting ngdpthe sum of all nominal spending in the economy, or alternatively a nations incomewould have greatly reduced the severity of the great. I have not discussed this alternative approach here today. May 4, 2016 abstract this paper evaluates the welfare properties of nominal gdp targeting in the context of a new keynesian model with both price and wage rigidity. It has an intellectual pedigree that goes back well before the crisis, but even if we just focus on the recent debate over changing fed policy to targeting. Nominal gdp is the market value moneyvalue of all final goods and services produced in a geographical region, usually a country. The raw gdp data, before inflation is called nominal gdp. Nominal gross domestic product is defined as a gdp measure, expressed in absolute terms. A working solution to the question of nominal gdp targeting although stabilizing nominal gdp has been suggested before as an objective for monetary policy actions, an increasing number of economists have tried to revive the idea since the financial crisis of 2008 and the apparent ineffectiveness of manipulating the federal funds.
On the e ciency of nominal gdp targeting in a large open economy. Pranjul bhandari and jeffrey frankel, harvard kennedy school. A close cousin of price level targeting is nominal income targeting. The use of divisia monetary aggregates in nominal gdp targeting. Excluding the 196970 and 197375 recessions, a regression of exur on current and past values of ngap has an r2 of 75%. Oct 06, 2014 nominal gross domestic product gdp targeting is a type of monetary policy that people like me think would give us a more stable economy than we currently have. The objective of this paper is to study the desirability of nominal gdp targeting within the context of a new keynesian model with both price and wage rigidity.
Minutes of the federal open market committee december 12. On the desirability of nominal gdp targeting, nber working papers 21420, national bureau of economic research, inc. Instead of targeting inflation, central banks would start to target nominal gdp, which is the product of price level as measured. Nominal gdp can be understood as sum of all spending in the economy. Some economists have suggested that the best way to ensure that price stability is the. However, if agents do not include forward guidance from dynamic target paths in their forecasting, then performance of pricelevel and nominal gdp targeting is much less satisfactory. Economic fluctuations and growth, international finance and macroeconomics, monetary economics. The mises daily articles are short and relevant and written from the perspective of an unfettered free market and austrian economics. Nominal gdp targeting for a speedier economic recovery. Ngdp targeting as a framework nominal gdp ngdp targeting is sometimes recommended based on new keynesian modelse.
Developing countries are better suited for it, however, in light of. Nominal income targeting national bureau of economic. Second, inflation targeting could be replaced by a flexible pricelevel or nominal gdp targeting framework, where the central bank targets a steadily growing level of prices or nominal gdp, rather than the rate of inflation. Nominal gross domestic product gdp targeting is a type of monetary policy that people like me think would give us a more stable economy than we currently have. A case for nominal gdp targeting in india harvard kennedy school. Jun 28, 2014 patrick sullivan directed me to a post that is mildly critical of ngdp level targeting, by stephen cecchetti and kermit schoenholtz. All the monetary policy rules that we consider in this paper are compatible with achieving any particular longrun average rate of inflation. This column is an obituary to inflation targeting and call for nominal gdp targeting to replace it. On the e ciency of nominal gdp targeting in a large open economy1 matthew hoelle2 m. The notes in this compilation discuss the relative strengths and weaknesses of inflation visavis nominal gdp targeting. Nowcasting nominal gdp with the creditcard augmented divisia monetary aggregates william a.
Is nominal gdp targeting a suitable tool for ecb monetary. Real gdp is a macroeconomic measure of the value of output economy, adjusted for price changes. This pdf is a selection from an outofprint volume from the national bureau. In the case of inflation targeting it, by contrast, the full. The targeting rules are compared with those for a standard taylor rule. Many analysts argue that the best guide might be nominal gross domestic product gdp. Nominal gross domestic product gdp targeting may do a better job of adjusting monetary policy for fundamental factors that are changing over time, such as productivity growth or demographic factors. One of the main results is that nominal gdp and in. We evaluate nominal gdp and price level targeting by computing the values of simple loss functions. Nominal gdp level targeting ngdplt has become an increasingly popu lar mon etary policy framework over the past decade. Jan 21, 2016 nominal gdp targeting is just another red herring to divide conservative monetary consensus nathan lewis contributor opinions expressed by forbes contributors are their own.
The measure most often used in the united states is called the nominal gross domestic product the gdp. The adjustment transforms the nominal gdp into an index for quantity of total output. Nominal gdp targeting with heterogeneous labor supply. Ngdp targeting splits the impact of supply shocks automatically between inflation and real gdp growth. Total consumer price inflation, as measured by the 12month percentage change in the price index for personal consumption expenditures pce, remained below 2 percent in october and was lower than early in the year. In the paper we evaluate nominal gdp ngdp as an alternative monetary policy target for a country like india, especially in the face of the large supply shocks that it faces. In particular, we compare the welfare properties of nominal gdp targeting to two other popular. Desirability of nominal gdp targeting under adaptive learning nominal gdp targeting has been advocated by a number of authors since it produces relative stability of inflation and output. He federal reserve has shown that it would support making price stability the explicit goal of monetary policy.
It would replace the bank of englands current monetary policy, inflation targeting. On the design front, considerable effort went into defining price stability, agreeing a target range for inflation as price level targeting was ruled. The sum is the target rate of nominal income growth. Sumner the history of central banking is a story of one failure after another. Udara peiris 3 january 31, 2014 krannert working paper series, paper no. The close connection between nominalgdp targeting and the. Gross domestic product in any study of the aggregate economy, one of the key elements is the aggregate amount of goods and services produced over a certain period of time. Nominal gdp targeting for developing countries pranjul bhandari, jeffrey a. Facts, fears, and functionality of ngdp level targeting. However, all of the papers assume rational expectations on the part of private agents. Clark as the monetary aggregates have become less reliable guides for monetary policy, considerable interest has developed in identifying some other fundamental guide for policy.
Nominal gdp targeting as an alternative framework for. A nominal income target is a monetary policy target. Conduct monetary policy set the reference interest rate to keep nominal gdp growth at or close to that target rate. A new keynesian model we employ a standard new keynesian model as the analytical frame work.
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