If NGDP-LT is “silly”, “long live silliness”!

Tony Yates takes not one but two stabs over my “disapproval” of inflation targeting:

  • It’s put to me that NGDP targetingis a better way to avoid the zero bound than raising the inflation target. This question can’t be answered definitively without reference to a model, or class of models.  So, as ever, let’s take the standard monetary, sticky price model, of which there are several variants, used in central banks to simulate the effects of monetary policy.  It may not be right, but it is beholden on market monetarist NGDP fanatics to write down a different and better one if they don’t like it, or its conclusions.

  • It would be reasonable to scoff at this and argue for nominal GDP targeting on grounds of simplicity.  But then, as I said in the last post, on grounds of simplicity I’d argue for sticking with the status quo, with plenty of communication about how the central bank also cares about nominal wage growth, the real exchange rate, spreads and unemployment.

But it appears, from the empirical evidence spanning more than 50 years, that “silly” is the way to go!

A couple of months ago, Brad DeLong argued that at present a 2% IT level is “not proper”:

If you don’t mind kissing the zero lower bound when you cut interest rates by 600 basis points, you could get away with a 4%/year inflation target.

And if you don’t mind dissing the zero lower bound and do not buy the argument that the “natural” short-term safe real interest rate when the economy is in the growth-along-the-potential-path phase of the business cycle is now not 3%/year but 2%/year, then you could get away with a 3%/year inflation target.

But I do not see how you can justify a 2%/year inflation target today.

And my comment on that, which is basically what Tony is putting forth, was: “There´s no proper inflation target, just a proper nominal spending level target.”

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One thought on “If NGDP-LT is “silly”, “long live silliness”!

  1. “So, as ever, let’s take the standard monetary, sticky price model, of which there are several variants, used in central banks to simulate the effects of monetary policy. It may not be right, but it is beholden on market monetarist NGDP fanatics to write down a different and better one if they don’t like it, or its conclusions.”

    I wonder where not being able to stomach the results those models used in those infallible central banks produce fits into Mr. Yates. calculus. MMer’s don’t need snowballs to hit us in the face to know that it has snowed, about the same as we rather not face wrack and ruin before those models and weddedness to them experience an unhappy divorce.

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