Hayek's Rule, NGDP Targeting, and the Productivity Norm: Theory and Application

Abstract

The 2008 crisis demonstrated that, absent inflationary pressures, significant economic stress can occur as a consequence of loose monetary policy. This scenario raises the question as to whether there is a better alternative to price stability as a guiding principle for monetary policy. In this paper, I explore the theoretical insights of the productivity norm, its superiority to price stability as the focus of monetary policy, and the challenges of applying such principles by central banks.

Keywords: Hayek Rule, NGDP Targeting, productivity norm, monetary policy, price level

JEL Classification: E31, E32, E52, E58