The Promise of Nominal GDP Targeting
17 Pages Posted: 27 Sep 2018
Date Written: March 2018
Monetary policy is important for two key reasons. First, monetary policy determines the path of the price level, and it heavily influences other variables like nominal wages and nominal GDP. As seen in the 1970s, high inflation can be damaging to the health of the economy and to the well-being of individual citizens. Savers are punished, and resources are diverted from productive investments into inflation hedges such as gold. Second, monetary policy plays a big role in the business cycle. As demonstrated by the Great Depression, and to a lesser extent the global recession of 2008–2009, unstable monetary policy can lead to high unemployment and financial turmoil. Unpredictable monetary policy is especially harmful. The great amount of attention devoted to the Federal Reserve and its actions indicates that the current system is not as predictable as the market would like. A different monetary policy system could enhance predictability and ensure sound money.
This primer will present one such system: nominal gross domestic product (NGDP) level targeting. The first section will clearly define monetary policy, describe the two main methods that central banks have traditionally used to carry out policy, and analyze the weaknesses of these methods. Later sections will articulate what NGDP is and how a policy of NGDP targeting works. Subsequent sections will list the most common criticisms of NGDP targeting and explain why these criticisms are misguided, and they will present arguments in support of the policy. Finally, the primer will provide specific recommendations for how to move from the current system to a system based on NGDP futures targeting.
Keywords: nominal GDP, futures markets, prediction markets, policy targets, central banks, policy efficiency, monetary policy, Federal Reserve
JEL Classification: E5, E3
Suggested Citation: Suggested Citation