Nominal GDP Targeting: An Introduction with Market Applications

A few weeks ago, I joined Michigan Interactive Investments, the premier finance club at the University of Michigan. Every week during our meetings, we have a market update during which we sound off our opinions on recent market events. And, as readers know, I take a great interest in monetary policy and have been very vocal about the positives behind the Federal Reserve's recent moves in terms of QE3 and conditional forward guidance.

However, I find that there's a disconnect between my understanding and perception of monetary policy and that of my fellow peers at MII. My suspicion is that it has something to deal with the differences between practitioners and academics, but I am still unsure of the specific difference. As a result, I prepared a presentation on this issue and wanted to share it with the rest of the blogosphere. I consider this different from Evan's excellent post on the layman's guide to NGDP targeting for two key reasons. First, this is targeted for those who are already financially literate -- ie they know what treasury bonds and other financial indicators are. Second, it's meant to be more visual to drive the point home in a presentation.

Considering I used quite a few graphs that have been inspired by debates I've encountered through blogging, I thought it would be apropos to present it here first. I hope it is useful for explaining nominal GDP targeting to a more technical financial crowd or undergraduate economics students. As always, comments are encouraged, and I'm happy to revise the presentation if I missed something.