Reply to Austan Goolsbee
By Scott Sumner
In a tweet, former Obama economic advisor Austan Goolsbee asked:
q for NGDP target fans: if fed target=5% when actual=0, implicitly means target 5% infl for 1 yr. Wouldn’t mkt doubt 5% infl just temporary?
The answer (from a fellow UC alum) is no. A good example occurred in 2007-08:
July 2007 to July 2008: CPI rises 5.5%
2007:Q3 to 2008:Q3: Real GDP falls by 0.3%
That data is pretty close to the supply shock Austan has in mind. And during the third quarter of 2008 inflation expectations (TIPS spreads) fluctuated above and below 2%. Investors know that inflation spikes due to supply shocks are transitory. Under NGDP targeting, inflation doesn’t have momentum; NGDP growth does.
There is a separate issue of what happens if trend RGDP growth slows. I favor stabilizing NGDP per capita. If it slows due to lower productivity, then slightly higher inflation is actually desirable, and vice versa. During the productivity boom of the late 1990s, the Fed should have aimed for below trend inflation, to allow room for higher inflation in the next recession.
PS. I presume Goolsbee means “real” when he says “actual.” NGDP is “actual” GDP. RGDP is a number pulled out of thin air by government bureaucrats. It doesn’t correspond to anything in the real world, unless you think a government bureaucrat’s estimate of how much more you enjoy watching I Love Lucy on a 4k 80 inch OLED TV compared to a black and white TV is constitutes “interesting philosophical speculation.”