Targeting Nominal Gross Output (NGO) will not provide Nominal Stability

At the closing of 2015, Vincent Geloso proposed that the Fed target Nominal Gross Output (NGO), concluding:

If monetary policy should shift to targeting nominal spending, NGDP is not the best indicator – NGO is.

Nick Rowe did a post (which includes a pertinent comment by Matt Rognlie).

In his comeback, Vincent writes:

When there is a shift of the demand for money, this will affect all transactions, not only those on final goods. Thus, my first point: gross domestic product is not necessarily the best for monetary transaction.

However, Market Monetarists are not on the lookout for the best indicator of monetary transactions, but are focused on Nominal Stability, and that is attained when NGDP follows a stable level growth path.

Vincent shows this chart


And writes:

…total nominal spending did drop massively during the recession (see the fall of wholesale, gross output and retail) while NGDP barely moved while, before the recession, total nominal spending did increase much faster than NGDP.

The chart below is a simplified version


I almost chocked when Vincent says “NGDP barely moved”. In fact, the drop in NGDP was the biggest since the 1930s!

Matt Rognlie´s comment is to the point:

…This confirms the hypothesis that commodity prices played a big role: you’d expect them to push up nominal GO/VA in 2007 and early 2008, then push it down in late 2008, which is exactly the effect that disappears once you control for prices.

And therein lies the problem in trying to target NGO. It is much like trying to target headline inflation (or the headline price level). Those targets are often “polluted” by relative price changes arising from, for example, oil price shocks.

And monetary policy should not react to real (supply) shocks. 2008 is, in fact, eloquent testimony of the Fed´s mistaken reaction to the oil shock. (And it is ironic that that mistake was made by Ben Bernanke who, in 1997 said the impact of an oil shock on the real economy (RGDP) was dependent on the reaction of monetary policy)

The result: Nominal Instability!

These old charts illustrate the Nominal Stability generating power of having NGDP growing close to a target trend path. Although there´s no equivalent NGO data to compare, I doubt the structure of NGO would give rise to an equivalent outcome.



12 thoughts on “Targeting Nominal Gross Output (NGO) will not provide Nominal Stability

  1. Dunno: NGO and NGDP are two guard dogs. If they both bark at the same time, we know what to do, even if one barks a bit louder than the other. But if one starts barking, and the other wags its tail, which one do we listen to?

  2. Marcus: two little things I have to comment on

    A: I am sorry for my poor communication skills seen when I wrote “it barely moved”. What I meant was “compared to the fall in gross output, it barely moved”. My mistake could easily give room for one to check.

    B: I will ask in the form of a question: admitting that it may be a noisy nominal spending figure, could it still be defendes that NGO would offer a good policy evaluation tool (a hindsight tool)? In other words, NGO might be better at capturing when – with hindsight – monetary policy was easy or tight

    • Vincent, thanks for commenting. On the “it barely moved” I understood it as a relative measure. And it´s one of the reasons I would take issue with NGO – it jumps around so much, proppeled by all those relative price movements, that it would be a “difficult nominal target” to “shoot at”.
      On B, I think that even as a “hindsight tool” it presents difficulties. In fact the same sort of difficulties that are produced by targeting inflation. My charts show, empirically, that if the CB manages to keep NGDP evolving close to trend, nominal stability will ensue, and that provides for real stability.

      • Give me a day or two, I will try to see if I can replicate your graphs with an equivalent of GO (Skousen’s GDE mentionned in my second comment)

  3. Marcus Nunes accomplishes more with his graphes than tbe Fed with its platoons of Phds and nearly incomprehensible papers.

  4. NGDP may not be the “best” target. I have read some about NGDI possibly being better. But the aspect of monetary policy that I have been writing about while wearing my Market Monetarist hat is not so much about macro in and of itself as its practicality in practice. With having to “control for prices,” we would still have the same problem as we do with the inflation target today, disagreements regarding which prices should be “controlled” with evolution of different indexes that are spoken to interchangeably in regard to monetary policy as if they are apples to apples when exclusions and methodologies for each are entirely different and produce different results if used for that purpose. I am still unsure if there has ever been a consensus on which inflation index is the “correct” one to be used for the purposes of monetary policy. All of this has produced a generally confusing and counterproductive public conversation about monetary policy, and doesn’t lend much to the cause of policy transparency and accountability.

  5. Pingback: Was Murphy Foolish to Take Caplan’s Bet? | Notes On Liberty

  6. Pingback: NGO v. NGDP: In reply to Nunes and Sumner | Notes On Liberty

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