NGDP targeting is not "easy money"
By Scott Sumner
One of the many frustrations that I face in advocating NGDP targeting is the misconception that this policy regime is more “expansionary” than inflation targeting. In fact, the two are identical in the long run, and in the short run each of the two will be more expansionary about 50% of the time and more contractionary about 50% of the time. The misconception probably came about from the fact that market monetarism first became known around 2008-09, when NGDP targeting was the more expansionary option.
Tracy Wilkinson sent me a very nice article by Christina Leung and Kirdan Lees, discussing the advantages of NGDP targeting for New Zealand:
Right now the gap between inflation and nominal income growth is pretty big and growing, yielding materially different interest rates settings depending on the underlying framework.
Our current inflation targeting framework says lower interest rates are required to hit a two percent target while a nominal GDP target would suggest interest rates are about right.
If the current low inflation environment persists for much longer it is difficult to justify the extended period of inflation away from target as temporary factors. Either rates need to be lower or the inflation target is undermined.
In contrast, nominal GDP targeting seems like an increasingly sensible framework for setting monetary policy delivering a better mix of inflation and GDP growth.
At the very least, there are appealing options should inflation targeting run out of steam.
Thus at this particular moment in time, NGDP targeting calls for a tighter monetary policy stance than inflation targeting. (Perhaps due to the recent plunge in commodity prices, especially oil.)
As far as I recall, back in the 1980s most advocates of NGDP targeting were right of center (although not all.) In recent years it’s been the opposite (at least among elite macroeconomists, not including market monetarists.) This is unfortunate. It should not be viewed as a hawk vs. dove issue; this is a technical problem—which government (fiat) monetary policy minimizes distortions in a market economy? Which monetary policy is least likely to lead to an unstable economy, giving the public the (false) idea that there is something wrong with free market capitalism? Both liberals and conservatives should be opposed to destabilizing monetary policy.