They haven´t done their homework properly

This is from the FOMC minutes of their last meeting (my bolds):

More broadly, a number of participants expressed concern that switching to a new policy framework could heighten uncertainty about future monetary policy, risk unmooring longer-term inflation expectations, or fail to address risks to financial stability. Several participants observed that the efficacy of nominal GDP targeting depended crucially on some strong assumptions, including the premise that the Committee could make a credible commitment to maintaining such a strategy over a long time horizon and that policymakers would continue adhering to that strategy even in the face of a significant increase in inflation. In addition, some participants noted that such an approach would involve substantial operational hurdles, including the difficulty of specifying an appropriate target level. In light of the significant challenges associated with the adoption of such frameworks, participants agreed that it would not be advisable to make such a change under present circumstances.

But note:

  1. Nothing heightens uncertainty more at present than the absence of an explicit TARGET
  2. If in the long run inflation is determined by money growth, if you specify a growth path for NGDP, how can you unmoor inflation expectations?
  3. Although financial stability is a separate issue, maintaining a stable path for NGDP avoids worsening any financial “instability” that can come about. In 2008, when NGDP tanked financial problems went up exponentially.
  4. How can the Committee make a credible commitment? Remember than even without an explicit TARGET the Committee was credible for more than 20 years!
  5. As in 2 above, if the path of NGDP is adhered to, how can a significant increase in inflation (not defined as a relative price change, but as a “continued increase in the general level of prices”) take place?

But it´s much easier to “fiddle with communication strategies”, even though without a TARGET they are just “empty words”.

Update: Scott Sumner has a more extensive discussion

6 thoughts on “They haven´t done their homework properly

  1. Suppose the Fed’s goal is to keep short term interest rates stable subject to the contract that neighter the unemployment rate or the cost of living rise so much that the Fed loses its independence. Keeping nominal GDP on a stable growth path might result in volatility in short term interest rates (financial instability.)

  2. Also from the FOMC minutes of their last meeting:

    The Committee also considered policy strategies that would involve the use of an intermediate target such as nominal gross domestic product (GDP) or the price level.

    The staff presented model simulations that suggested that nominal GDP targeting could, in principle, be helpful in promoting a stronger economic recovery in a context of longer-run price stability.

    Other simulations suggested that the single-minded pursuit of a price-level target would not be very effective in fostering maximum sustainable employment;

    it was noted, however, that price-level targeting where the central bank maintained flexibility to stabilize economic activity over the short term could generate economic outcomes that would be more consistent with the dual mandate
    ***********************
    My comment —
    It looks like the Fed is beginning to take GDPn targeting seriously. This is at least a step in the right direction. It can stabilize longer-run price stability as noted while it can stabilize short and long run labor demand, fostering maximum sustainable employment. This contrasts with pure price level targeting that in the short run would not stabilize real GDP, with needless business cycles as a consequence.

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