David Beckworth and Ramesh Ponnuru have an article in the latest issue of National Review: “The right goal for Central Banks” with a great subtitle: “When the target is nominal, results are phenomenal”:
A global economic crisis may be painful, but it can provide some useful lessons. Countries recovered from the Great Depression in the order that they exited the gold standard of the time, which is a major reason most economists no longer favor that monetary regime. The turmoil of the last few years has followed a pattern as well: The more a country’s central bank has done to keep nominal spending growing at a steady rate, the better that country has done. This international experience adds to an already-strong theoretical case for keeping nominal spending — the total amount of money spent in an economy — on a predictable path.
They show the following figures to buttress their argument:
And B&P write:
In the years leading up to the crisis, all the central banks were conducting monetary policy in a manner that caused changes in the money supply to roughly offset changes in how often money was used. That’s why nominal GDP closely fits the trend in all the economies during this time, as seen in Figure 1. For Israel and Australia, this process continued through the entire period. In the United States the offsetting mechanism broke down in 2008–09. The eurozone has not yet fully recovered from a similar breakdown that occurred in 2010. (The breakdowns are highlighted by gray bars.)
Just to be on the “safe side” I add Poland, which tells the same story but with a twist. As the figures for Poland indicate, from early 2006 to 2011 monetary policy was “too expansionary”. This allowed Poland to avoid the fate of its Euro neighbors. Now it is trying (apparently successfully to bring spending back to trend).