Nick Rowe did a post wondering if, even for Canada which has had 20 years successful experience with Inflation Targeting (IT), NGDP Targeting, Level Target (NGDPTLT), wouldn´t be better.
On the other side of the ledger this post derides NGDPT solely based on the (contested) conclusions of a 1999 paper by Larry Ball. This brought forth forceful critiques by Scott Sumner and Bill Woolsey.
Taylor said that “too many goals blur responsibility and accountability.” He cited the Fed’s unconventional strategy for stimulating the economy, known as quantitative easing, as an example of a policy that was justified based on the Fed’s dual mandate. He said that “such interventions often have the unintended consequence of leading to higher unemployment.”
The push towards a single mandate appears to be “deduced” from the “principle” enshrined in the “Devine Coincidence”, which refers to a situation where stabilizing inflation is the same as stabilizing real output (and employment). (See here for a discussion).
From Bernanke´s writings it seems that he also believes in the “overall stabilizing powers” of IT, although he never came out in favor of a single mandate (maybe because he believes that with IT the “maximum employment” part of the mandate would be “automatically” attained). This is Bernanke 12 years ago:
Adoption of inflation targeting by the Federal Reserve would bring several major advantages over the current, less structured approach. First, it would transform the commitment to price stability—which has served us so well under Mr. Greenspan and his predecessor, Paul Volcker—from a personal preference of the chairman into an official policy. By depersonalizing and institutionalizing the Greenspan policy approach, the Fed would increase the likelihood that future U.S. monetary policy will look like the 1980s and 1990s rather than the 1930s or the 1970s.
Note the irony. In trying to avoid the 1970s he was “presented” with the 1930s! And I think that was because he “misinterpreted” Greenspan´s policy approach. But that´s not surprising because Greenspan himself didn´t know exactly what his “policy approach” was, just that it “worked”!
I´ll argue, in visual fashion, based on the US experience over the last 50 years that the “dual mandate” should be scrapped. The new mandate would be neither of the existing ones, in particular not the “price stability only” favorite. The ideal mandate should be that the Fed adopt NGDPTLT because that has proved to be, even if unwittingly and never explicitly acknowledged, the best way to simultaneously stabilize both inflation AND real output growth.
The panels below, each classified by Fed Chairman, depict growth rates and volatility of:
- Inflation (growth rate of prices) and its volatility
- RGDP growth and its volatility
- NGDP growth and its volatility
It´s very easy to see that the only time both real growth and inflation were stable was when the growth of NGDP was also stable (and in fact growing along a level path).
For example, during the Bernanke years inflation has remained stable and low but the instability injected into NGDP growth by monetary policy resulted in high real growth instability, with terrible consequences for the overall real economy, in particular for employment/unemployment.