A formal discussion of NGDP Targeting has reached the Shadow Open Market Committee. Let´s hope it progresses to the ‘real McCoy’.

Bennett McCallum was an early proponent of NGDP Targeting. He favors NGDP growth rate targeting over NGDP level targeting. From the conclusion of his presentation: “Nominal GDP Targeting: Policy Rule or Ad-Hoc Splurge?”:

It must be stated explicitly that the foregoing discussion does not point to any inconsistency on the part of Woodford. As he would perhaps emphasize, the discussion in Woodford (2013) is not concerned with policy rules of the type that is considered above in Section 3. Instead, in this more recent piece Woodford’s main concern is to devise communication strategies for informing the public about policy actions to be taken in the future. In particular, the relevant topic is “forward guidance,” defined as “explicit statements by a central bank about the outlook for future policy, in addition to its announcements about immediate policy actions that it is undertaking” (Woodford, 2013, p. 186). In this context it would be difficult to disagree with one of his positions, namely that “… the most effective form of forward guidance involves advance commitment to definite criteria for future policy decisions…,” rather than mere forecasts.

This paper’s body of research is very impressive, intellectually. To me, however, its focus on forward guidance seems to distract one from a larger issue, namely, that the Federal Reserve has not been willing to conduct policy in accordance with any clearly defined policy rule (such as the Taylor Rule). A nominal GDP target for this rule, rather than the weighted average of inflation and output gaps as embodied in the Taylor rule, would represent a slight simplification that might add clarity and could be helpful in communication with the public. Within that context, the discussion in Section 3 above indicates that the growth-rate version would be preferable.

More generally, an emphasis on the forward-guidance literature, with its subtle and indirect expectational effects, seems rather misguided. For many years, until the introduction of the Euro, the world’s most respected central bank was the Deutsche Bundesbank. This was true despite the fact that its rhetoric was rather inconsistent with its actions. Its policy was effective, nevertheless, because the public knew, from experience, that it was dedicated to keeping inflation under control, at a reasonably low rate.

HT David Levey

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