The Economist in favor of NGDP Targeting

I was chatting with Lars just as he was posting on the latest Economist Leader. I do it here also because it´s a ‘milestone’. After all, it´s not just any magazine but THE Economist!

One thing is having a Free Exchange blogger – Ryan Avent – say in November 2011:

I think critics wrongly assume that supporters of NGDP targeting consider it a panacea. I certainly don’t. I do think it would represent a meaningful improvement on current practice in all situations, and a substantial improvement during times like the present. And I think that the growing wave of support behind the policy is mostly due to accurate perceptions about the advantages of a switch. For this reason, I welcome the criticism; I think it will only speed the move toward a change in the Fed’s target.

Or, just yesterday:

In Britain, there have indeed been misses, as the chart at right shows. As of the third quarter of 2012 nominal output was nearly £300 billion (or 18% of NGDP) short of the trend level immediately pre-crisis. Even assuming that policy immediately prior to the crisis was too loose and that the crisis delivered a structural reduction in Britain’s growth potential, the economy remains well below where it might reasonably have been expected to be at this point, in terms of the cash spent and earned in the economy.

That shortfall reflects the contribution of weak demand to Britain’s economic troubles.

It´s quite another for the Economist Leader to have this headline:

Shake ´em up, Mr. Carney:

The Bank of England has been willing to use unconventional tools. It was an early pioneer of quantitative easing; its more recent “funding for lending” scheme for banks is a clever way to bring down banks’ funding costs (and should be used to hit the nominal GDP target). But Britain’s central bank has been less successful at mapping its future policy path. The Bank has interpreted its 2% inflation target in a flexible way, keeping monetary conditions loose even as inflation has stayed higher. But it has not said how long such flexibility will last. Each time its interest-rate-setting committee meets, there is the possibility it will change its mind.

That is where the nominal GDP target comes in. By promising to keep monetary conditions loose until nominal GDP has risen by 10%, the Bank would provide certainty that interest rates will stay low even as the economy recovers. That will encourage investment and spending. At the same time an explicit target of 10% would set a limit to the looseness, preventing people’s expectations for inflation becoming permanently unhinged. It is an approach similar in spirit to the Federal Reserve’s recent commitment not to raise interest rates until America’s unemployment rate falls below 6.5%.

Certainly a big step forward.

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