Monday, March 12, 2012

Mechanisms Behind NGDP Stability

I just wanted to jot this post down so I could remember the over 9000 reasons NGDP targeting is more effective than the alternatives:

Instantaneous - future expectations of nominal GDP determine today's NGDP
Focus on the policy variable - there is no intermediate proxy, ergo hell or high water, the target is hit
Lessens impact of financial crises - as long as expectations are anchored, the biggest failures don't spread throughout the macroeconomy
Resiliency to supply shocks - no overshooting or undershooting compared to an inflation targeting regime
Is "costless" - as compared to fiscal policy, NGDPLT doesn't require sovereign debt
Stable expectations - level targeting has a "memory", so past failures are corrected for
Politics - it's easier to advocate for higher nominal incomes than higher inflation
No impact of inflation on creditors - fundamentally, it's about NGDP.  If it's a real shock, everybody has to bite the bullet
Interest rates - higher NGDP expectations raise the interest rate, allowing more room for conventional monetary policy


  1. Lulu, what does the scouter say about Scott Sumner's power level?

    Sorry, couldn't resist.

  2. It's growing at 5% per year. Sorry, but gotta have a rule-based super saiyan policy.