Some economists advocate nominal gdp targeting as an alternative to the taylor rule. The early 1980s saw monetarism as the official policy regime in some major countries. The new ngdp forecasts have been downgraded slightly for all time horizons. Nominal gdp is gross domestic product gdp evaluated at current market prices, gdp being the monetary value of all the finished goods and services produced within a countrys borders in. Recessions would feature higher inflation and booms would feature lower inflation or. Patrick sullivan directed me to a post that is mildly critical of ngdp level targeting, by stephen cecchetti and kermit schoenholtz. The arguments in favor of nominal gdp or pricelevel targeting and the cited studies about multiple equilibrium under a taylor rule are both. That means that if economic growth was lower than usual, the bank would have to try to make inflation higher than usual. Conduct monetary policy set the reference interest rate to keep nominal gdp growth at or close to that target rate. Mar 19, 2018 introductionmonetary policy is important for two key reasons. Several people have asked me to comment on nominal gdp targeting, as recently proposed by scott sumner, christina romer and paul krugman.
The first principle is that monetary policy should aim to stabi lize some nominal quantity. Equivalent alternatives include targeting the level of nominal income more on this below, or choosing different proxies for aggregate nominal. Policy primer, mercatus center at george mason university, arlington, va. The macroshare economy and nominal gdp targeting article pdf available in theoretical economics letters 0707. Nominal gdp targeting and the taylor rule on an even playing. Nominal gdp targeting is an attractive way of conducting monetary policy. The sum is the target rate of nominal income growth. Romer concluded her remarks with optimism for a new target. Is nominal gdp targeting a suitable tool for ecb monetary policy. In particular, we compare nominal gdp targeting to inflation and output gap targeting as well as to a conventional taylor rule. This paper evaluates the welfare properties of nominal gdp targeting in the context of a new keynesian model with both price and wage rigidity. The gdp deflator in the base year is always equal to 100.
With nominal gdp as the intermediate target when real output falls pushing nominal output below target, there isnt a separate in ation target to worry about that ties policymakers hands when trying to respond to the fall in real output. The potential benefits of nominal gdp targeting nominal gdp may be a useful guide for policy because it is closely related to real gdp growth and inflation. One of the most popular these days is the idea of nominal gdp targeting. E5,f41 abstract the revival of interest in nominal gdp ngdp targeting has come in the context of large advanced economies. This interestratetargeting regime, sometimes compared to economist john taylors famous policy rule, worked rel. The promise of nominal gdp targeting mercatus center. 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. Nominal gdp targeting is just another red herring to. The subject of nominal gdp targeting has been ongoing within the economic blogosphere for at least the past couple of years. 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.
Nominal gdp level targeting has recently been proposed as a way of getting out of liquidity trap situations since the history dependent nature of level targeting. Nominal gdp targeting with heterogeneous labor supply. This paper was written in early december 2014 in response to the federal reserve challenge teams argument for a regime change in the federal reserve to nominal gdp targeting as the appropriate policy to return the u. These comparisons are made on the basis of welfare losses relative to a. These arguments are largely based on the idea that nominal gdp targeting would require less knowledge on the part of policymakers than a traditional taylor rule. It would replace the bank of englands current monetary policy, inflation targeting. The gdp deflator is a conversion factor that adjusts nominal to real gross domestic product by measuring the level of current prices compared to the level of prices of the base year. Jan 21, 2016 one of the most popular these days is the idea of nominal gdp targeting.
Monetarists have sought to make monetary policy stabilize the growth of the nominal money stock. Nominal gdp targeting for developing countries pranjul bhandari and jeffrey a. The raw gdp data, before inflation is called nominal gdp. We argue that the case for ngdp targeting is even more appealing for mid. Introductionmonetary policy is important for two key reasons. Bennett mccallum tepper school of business, carnegie. The close connection between nominalgdp targeting and the taylor rule evan f. A policy of nominal gdp targeting is generally in conflict with infla tion targeting, because any. Apart from its parameters, it is di erent from eq4. Nominal gdp targeting can be adopted in terms of levels or growth rates. Nominal gdp targeting as an alternative framework for monetary. Take an indicative rate of real gdp growth its longrun trend or potential.
In particular, a nominal gdp targeting rule would not require real. Its components are real output and prices, and thus nominal gdp encapsulates both sides of the feds mandate. A case for nominal gdp targeting in india indias central bank is contemplating a move from its current multiindicator monetary policy approach, towards a simple credibilityenhancing nominal rule. The recent revival of interest in nominal gdp ngdp targeting has come in the context of large advanced economies. By definition, nominal gdp equals the product of real gdp and the price level. Ngdp targeting as a framework nominal gdp ngdp targeting is sometimes recommended based on new keynesian modelse. Removing uncertainty about future nominal income thus alleviates the problem of the stream of nominal debt repayments being fixed. The historical context was a desire to earn credible monetary discipline and lower inflation rates. 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. Commenters patrick sullivan and gofx directed me to a post on ngdp targeting in developing countries, by pranjul bhandari and jeffrey frankel. The results are robust to an endogenous growth extension of the model, implying that targeting the nominal gdp growth rate is more desirable than targeting the nominal consumption growth rate or the inflation rate in terms of macroeconomic stability. 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 nominal grossdomesticproduct gdp targeting.
Difference between nominal gdp and real gdp with comparison. Frankel, 2012, gives other references to the literature. A nominal income target may provide credibility to a commitment to keep real interest rates exceptionally low, until a target output level is reached even if. Developing countries are better suited for it, however, in light of big supply shocks and terms of trade shocks, such as monsoon rains and oil import price shocks in the case of india. Nominal gdp targeting as optimal monetary policy for the. In principle, these heterogeneous households may be able to partially selfinsure in this circumstance, thus altering the nature of the nominal gdp targeting policy or even rendering it unnecessary. Nominal gross domestic product is defined as a gdp measure, expressed in absolute terms. Savers are punished, and resources are diverted from productive. Nominal gdp targeting for developing countries sciencedirect. Nominal gdp targeting in developing countries econlib. Nominal gdp targeting, a contribution oregon office of. Jul 08, 2019 nominal gdp is gross domestic product gdp evaluated at current market prices, gdp being the monetary value of all the finished goods and services produced within a countrys borders in a.
I did research on nominal gdp targeting many years ago and found that such targeting proposals had a number of problems, which i summarized in the paper what would nominal gnp targeting do. First, monetary policy determines the path of the price level, and it heavily influences other variables like nominal wages and nominal gdp. Gregory mankiw there is increasing agreement among economists on two broad principles of monetary policy. Real versus nominal gdp inflation can distort economic variables like gdp, so we have two versions of gdp. A working solution to the question of nominal gdp targeting. Nominal income aggregates that can serve as targets include nominal gross domestic product ngdp and nominal gross domestic income gdi. One such proposal has been offered by scott sumner of george mason. Gdp was subject to large revisions, making policy difficult to communicate. During lower bound episodes, somewhat paradoxically, nominal gdp level targeting leads to larger falls in nominal gdp. A policy of nominal gdp targeting is generally in conflict with infla tion targeting, because any fluctuations in real gdp would lead to fluctua tions in inflation of the same size and in the. Interest in nominal gdp ngdp targeting has come in the context of large advanced economies.
The case for nominal gdp targeting mercatus center. Nominal gdp targeting as an alternative framework for. The levels version corresponds to discretionary optimality. The growth rate version corresponds to timeless perspective optimality. Romer provided a table showing that a nominal gdp level targeting would have improved the feds performance over the last five policy cycles. Nominal gdp is the broadest measure of economic activity in nominal terms, that is, not adjusted for infl ation from year to year. The earliest proponents of nominal gdp targeting were meade 1978 and tobin 1980, followed by other economists in the 1980s. Similarly, the growth of nominal gdp equals the sum of real gdp growth and inflation. The historical context was a desire to earn credibility for monetary discipline and lower inflation rates. The case for and drawbacks of nominal gdp targets jeffrey.
Real gdp values output using the prices of a base year. The close connection between nominalgdp targeting and the. We consider the case for ngdp targeting for midsized developing countries, in light. Nominal gdp targeting and the taylor rule on an even. Our paper is related to a large literature on optimal monetary policy. Oct 06, 2014 nominal gdp targeting would mean that the bank of england would stop trying to target price rises, and instead try to target the total amount of nominal spending that takes place in the economy. However, in the presence of persistent supply and demand shocks, strict price level targeting may be superior because it induces greater policy inertia and improves the tradeoffs faced by the central bank. All graphs and the pdf slides are updated with the nov 2011 fomc meetings forecasts released this morning. I compare nominal gross domestic product gdp level targeting with strict price level targeting in a small new keynesian model, with the central bank operating under optimal discretion and facing a zero lower bound on nominal interest rates. Pdf nominal gdp targeting as an alternative framework. Such targets are adopted by central banks to manage national economic activity.
Is nominal gdp targeting a rule policymakers could accept. Pranjul bhandari and jeffrey frankel, harvard kennedy school. The paths of the federal funds rate, nominal gdp, real gdp, and the price level under nominal gdp and price level targeting are simulated over the 2004. A policy of nominal gdp targeting is generally in conflict with infla tion targeting, because any fluctuations in real gdp would lead to fluctua tions in inflation of the same size and in the opposite direction. Instead of targeting inflation, central banks would start to target nominal gdp, which is the product of price level as measured.
Historydependence is a key feature of nominal income and pricelevel targeting as it can provide more guidance to the economy than inflation targeting. However, nominalgdp targeting would require more discipline from policymakers than. A nominal income target is a monetary policy target. Nominal gdp targeting and the monetary policy framework. For the nominal gdp target, the currency depreciates, helping the trade balance as well as gdp growth to improve and moderating the economic contraction. 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. The case for and drawbacks of nominal gdp targets brookings. May 22, 2017 difference between nominal gdp and real gdp last updated on may 22, 2017 by surbhi s gross domestic product or gdp refers to the economic value of goods and services produced within the nations boundaries, in a particular financial year plus income earned by foreign residents locally less income earned abroad by countrys residents. Nominal gdp targeting for dummies adam smith institute. The reserve bank of new zealand, the pioneer of inflation targeting, responded directly to a scott sumner report on income targeting, stating the reserve bank said that nominal gdp targeting was a complex, technical approach to monetary policy.
Targeting nominal gdp after years of fighting inflation, some are now urging the fed to instead target gdp growth and jobs. The past 23 years have seen something of a resurgence of interest in the proposal that a desirable rule for the conduct of monetary policy would be provided by a central bank that consistently aims, period by period, to achieve target values of nominal gdp, with these designed to grow over time at a rate equal the central banks preferred longrun average inflation rate e. Thus the trade balance worsens, as does gdp growth. As seen in the 1970s, high inflation can be damaging to the health of the economy and to the wellbeing of individual citizens. It is the aggregate monetary value of the economic output produced during. These results indicate that nominal gdp level targeting might be worth considering as an alternative framework for monetary policy. The large gap highlights an important aspect of nominal gdp targeting. Jun 28, 2014 patrick sullivan directed me to a post that is mildly critical of ngdp level targeting, by stephen cecchetti and kermit schoenholtz. 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. The first section will clearly define monetary policy, describe the two main methods that central banks have traditionally used to carry out policy, and analyze the weaknesses of these methods. Pdf the macroshare economy and nominal gdp targeting.
Targeting nominal gdp has been proposed in the context of major industrialised countries. On the desirability of nominal gdp targeting request pdf. Conduct monetary policy set the reference interest rate to. For nominal gdp level targeting there are advantages that come with the history dependence of levels. It reacts to deviations of ngdp from its target level. Nominal gdp can be understood as sum of all spending in the economy. Nominal gdp level targeting has recently been proposed as a way of getting out of liquidity trap situations since the history dependent nature of level targeting regimes is argued to influence inflation expectations in the desired way. Targeting ngdpthe sum of all nominal spending in the economy, or alternatively a nations incomewould have greatly reduced the severity of the great. But in fact there is quite a hot debate that it should be replaced with nominal gdp targeting. One such proposal has been offered by scott sumner of george mason univeristy the basic idea is that there would be. Central banks use a variety of techniques to hit their targets, including.
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