Tyler Cowen on NGDP targeting
By Scott Sumner
Here’s Tyler Cowen:
The thing is this: whether rationally or not, the American public hates higher rates of price inflation. Perhaps they mis-sample or mis-estimate prices, or perhaps the higher prices really do erode their real wages in a way they can’t get back through a new labor market bargain.
So a higher price inflation target would mean that everybody would hate the central bank. It would not shock me if the first thing they did was to dismantle…the higher price inflation target.
Under nominal gdp targeting, the rate of price inflation would not have to significantly rise until worse times were upon us. That is precisely when such upward price pressures would be most useful.
Here’s a comment I added at the end of his post:
Here’s the easiest way to sell this, without giving up the 2% inflation goal. And yes, it ‘s a goal, not a target. If it were a target then there would be no dual mandate:
1. Set a NGDP target at the Fed’s estimate of long run RGDP trend growth, plus 2%.
2. Every five or ten years re-estimate the long run trend RGDP growth, and (slightly) adjust the NGDP target accordingly.
3. Do level targeting.
They won’t get exactly 2% inflation in the long run, but they will actually get closer to 2% than they do now.
The Fed can tell Congress with a straight face that they are aiming for 2% inflation, but with some countercyclical fluctuations to address the dual mandate (employment) THAT THEY ARE ALREADY LEGALLY REQUIRED TO ADDRESS IN ADDITION TO INFLATION.
This isn’t rocket science. . . .
The Fed can tell Congress that NGDP is the intermediate goal and inflation is the long run goal.
Pure NGDP targeting would be slightly better, but this is close. And it’s far better than current policy.
PS. My “vacation” is almost over, and I should be able to address comments tomorrow.