NGDP Level Targeting? James Meade understood it almost 40 years ago!

From his 1977 Nobel Lecture:

Earlier I spoke of ‘price stability’ as being one of the components of ‘internal balance’. Yet in the outline which I have just given of a possible distribution of responsibilities no one is directly responsible for price stability. To make price stability itself the objective of demand management would be very dangerous. If there were an upward pressure on prices because the prices of imports had risen or because indirect taxes had been raised, the maintenance of price stability would require an offsetting absolute reduction in domestic money wage costs; and who knows what levels of depression and unemployment it might be necessary consciously to engineer in order to achieve such a result?

Flash forward thirty years to 2007 and the “danger” materializes under Bernanke Chairmanship of the Fed. And this mostly happens because Bernanke was known as an ardent defender of inflation targeting and would likely act accordingly (As most IT central banks did).

Later in the Lecture he proposes NGDP Level Targeting (and even  considers the “monetary offset”):

I have told this particular story simply to make the point that the choice between fiscal action and monetary action must often depend upon basic policy issues which should certainly be the responsibility of the government rather than of any independent monetary authority. Perhaps the best compromise is an independent monetary authority charged so to manage the money supply and the market rate of interest as to maintain the growth of total money income on its 5-per-cent-per-annum target path, after taking into account whatever fiscal policies the government may adopt.

It took a long time, but now a Center for research on NGDP targeting has been established!

From Meade´s Bio:

My interest in economics had the following roots. Like many of my generation I considered the heavy unemployment in the UK in the inter-war period as both stupid and wicked. Moreover, I knew the cure for this evi, because I had become a disciple of the monetary crank Major C.H.Douglas, to whose works I had been introduced by a much loved but somewhat eccentric maiden aunt. But my shift to the serious study of economics gradually weakened my belief in Major Douglas´s A+B theorem which was replaced in my thoughts by the expression MV=PT

Maybe Tony Yates, being British and all, would want to reconsider his view of NGDP targeting as “silly”!


4 thoughts on “NGDP Level Targeting? James Meade understood it almost 40 years ago!

  1. The problem with Yates and Wren-Lewis over here, and with PK over there is that they are big government liberals first and very suspicious of anything that gets in its way. Monetary offset is something to be merely waived away with a Government Decree, without a thought for the market reaction.

    I think they argue about monetary policy in bad faith. Their comment threads drip with sarcasm and contempt for market mechanisms. When there is another agenda it’s hard to make progress, a bit like arguing with Major Freedom et al.

  2. We see early advocates of NGDP targeting, spread throughout the profession, and even some FOMC board meetings decades back,

    Oddly, what is a non-partisan idea (NGDP targeting) is now rejected by both wings of the American political spectrum, the lefties as it does not involve more welfare spending, and the righties as it does not advocate zero inflation, or, even deflation (the new goal of the American right).

    I am hoping Scott Sumner at George Mason sanitize NGDPLT for the American right, but I suspect it is lost cause. And the lefties want government spending….

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