When danger looms, the NGDP-LT dog barks, the other dogs stay silent

David Beckworth brings attention to this interview with James Bullard where it he implies that the new AIT framework is equivalent, or approximates NGDP-LT.

That´s not true. The Great Recession was the result of the Fed “downgrading” the NGDP target level, and then continuing to practice NGDP-LT at a lower trend path (accompanied by a lower growth rate). However, AIT (or IT, or PLT) continued on the same trend path as before.

The charts illustrate. Until 2006, all those “targets” were “observationally equivalent”. You wouldn´t know if the Fed was targeting the average PCE core inflation, the PCE core price level or PCE core inflation. It could also be targeting NGDP at a particular level and growth rate.

From that point on, the NGDP-LT dog began barking to remind the Fed that it was being “derailed”. The other dogs remained on the path so the Fed, who never imagined that the overall nominal stability it had successfully attained (Great Moderation) was due, not to targeting inflation, average inflation or the price level, but to targeting NGDP at a particular trend path, was stunned by the depth of the recession.

A “new” and lower trend path for NGDP was followed after the shock, and that´s why the economy has been nominally stable since the end of the GR. Unfortunately, it is a “depressed” level of nominal stability. Given the new AIT framework, we risk, as I argued here, to “depress” the economy further following the Covid19 shock!

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