“Lost in translation”

In this very boring background paper to the “Rethinking Macro Policy II” conference being held today and tomorrow at the IMF, this is how Oliver Blanchard and co-authors dismiss NGDP level targeting when discussing:  “How should Central Banks Deal with the Zero Bound Problem?”

The crisis has also led to new discussions of a number of old ideas, including a shift to price level targeting or nominal-GDP targeting. Support for these rules may be partly opportunistic: A common feature of level-based approaches (i.e., rules that target the price level rather than the inflation rate, or nominal income rather than nominal income growth) is that, at this juncture, they would allow for higher inflation rates without undermining central bank credibility in the long run. Potential loss of credibility has been a major concern for central banks throughout the crisis, as evidenced by the reaffirmation by central banks of their commitment to remain vigilant against inflation with every round of unconventional policies. But these level-dependent rules have several shortcomings. An important one is that temporary price shocks are not treated as bygones and have to be absorbed through inflation, or worse, deflation.

It seems to me they´re making the same mistake Miles Kimball made in his otherwise favorable appraisal of NGDP targeting. They just cannot let go of a symmetrical inflation targeting mindset and believe that NGDP growth has to rise or fall following a positive or negative supply (price) shock.

One thought on ““Lost in translation”

  1. Blanchard wrote: “An important one is that temporary price shocks are not treated as bygones and have to be absorbed through inflation, or worse, deflation.”

    1) It seems that the *countries* that experienced temporary price shocks upon entry to the Euro are being treated as bygones. Europe is already using level targeting in the periphery to hit the German Euro target, and this is causing massive deflation.

    2) He didn’t address NGDP.

    Would be nice if the Blanchards of the world would address the actual situation instead of making it all up.

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