James Pethokoukis interviewed Stephen Oliner (a former Fed economist):
One last question I want to talk about, market monetarism, which is an update of Milton Friedman monetarism. There’s been some economists, such as Scott Sumner and a few others, who have said that the Fed should run monetary policy by targeting the level of nominal gross domestic product, total spending in the economy, not separating out inflation. And if we did that, you would have a much better macro environment. I’d love to get your thoughts on that idea.
So I think as a theoretical idea, it has a lot of merit. And I think many economists who aren’t necessarily associated with market monetarism as a school thought would agree that, as a theoretical idea, it has a lot of promise. I think the problem is in the implementation. So if a central bank targets nominal GDP, it means they are not specifically targeting either prices, they’re not targeting inflation, and they’re not specifically targeting real GDP. So the focus on keeping inflation near a target rate gets pushed to the back of the bus in a sense. And so I think the Fed will not go to a nominal GDP target, nor has any other central bank to my knowledge in the world gone to a nominal GDP target because they see it as risky from the point of view of maintaining inflation near target and maintaining credibility that they’re going to do that.
If “the focus on keeping inflation near a target rate gets pushed to the back of the bus in a sense” is the major impediment to an NGDP level targeting regime, I´m certain it will not be long before it is formally tried out by some central bank.
And that´s because it´s a misconception. No, inflation does not get pushed to the back of the bus. As I vividly and visually showed in this post, it is the best known way to attain Nominal Stability, which should be the overriding goal of any central bank. Inflation may have many ‘origins’, but has only one ‘cause’, and that´s monetary (or nominal) instability!
Since I love the charts that show the ‘power’ of having Nominal Stability, I´ll reproduce them here. As Scott Sumner told me: “Yes, I’d say that’s strong evidence.”