Which is the better target?

All through the “Great Moderation” we couldn´t be certain of what the Fed was targeting. It didn´t have an explicit target for anything, be it inflation, the price level or nominal spending (NGDP). The Bank of Canada on the other hand had a clear explicit mandate: Target CPI inflation at 2%.

But during a period of almost two decades you couldn´t tell if the Bank of Canada was targeting inflation, the price level or NGDP. All these were observationally equivalent. In fact, in the case of the BoC we became sure that he was not targeting NGDP only when the crisis hit, but you still could think it was targeting either inflation or the price level. The chart illustrates.

Targeting Regimes_1

In the case of the Fed, the same ‘doubts’ are true, even more so because, differently from the BoC, the Fed had no explicit target. The illustration below gives you a good idea about the ‘dangers’ associated with either inflation or price level targeting, and how NGDP targeting looks like a much better proposition.

Targeting Regimes_2

3 thoughts on “Which is the better target?

  1. Not to mention that Canada still have another “prudential” target: protect the housing market bubble to burst. So, even with a big Slack and low inflation, they are being stubborn and keeping rates at 1%… Best short term rate to receive against the US!

  2. Hi Marcus,

    Thank you for these articles they are really useful. I am currently working on a project on nominal GDP targeting in Emerging Markets – I was wondering if you could tell me where you get your NGDP and trend data from? Many Thanks

    • Sohil
      FRED is the first place to go. It has a large International Data section with many countries included. There´s always the Central Bank Statistics section in each country. The trend I estimate through regression.

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