The Case for Nominal GDP Targeting

24 Pages Posted: 25 Sep 2018

See all articles by Scott Sumner

Scott Sumner

Mercatus Center at George Mason University

Date Written: October 2012

Abstract

The recent financial crisis exposed serious flaws with inflation-targeting monetary policy regimes. Because of inflation fears, the Fed did not provide enough monetary stimulus in late 2008, allowing the largest decline in nominal spending since the 1930s. This demand shock intensified the financial crisis and led to high unemployment. Nominal GDP targeting would have greatly reduced the severity of the recession, and also eliminated the need for fiscal stimulus. The national debt today would be far lower if Fed policy had been more expansionary and Congress had not passed the 2009 fiscal stimulus. Nominal GDP targeting also makes it much easier for politicians to resist calls for bailouts of private sector firms. It assures low inflation on average, and reduces the severity of the business cycle. It also makes asset price bubbles slightly less likely to occur.

Keywords: Federal Reserve, monetary policy, gross domestic product, inflation, money supply, interest rates

JEL Classification: E5, E3

Suggested Citation

Sumner, Scott, The Case for Nominal GDP Targeting (October 2012). Mercatus Research, Available at SSRN: https://ssrn.com/abstract=3255027 or http://dx.doi.org/10.2139/ssrn.3255027

Scott Sumner (Contact Author)

Mercatus Center at George Mason University ( email )

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Arlington, VA 22201
United States

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