Tag Archives: target

Recent “U-turns” in Central Banks’ Forward Guidance Were Avoidable

          The Federal Reserve and the Bank of England have each recently backed away from “forward guidance” that they had given earlier in the form of thresholds for the unemployment rate.   As a result of their changes in emphasis, they are both being accused of confusing the financial markets.

The Fed at the end of 2012 had said that it planned on keeping monetary policy easy at least until the unemployment rate had fallen below 6 ½ %.     The Bank of England in mid-2013 had made a similar statement, with a threshold figure for UK unemployment of 7%.   

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Nominal GDP Targeting is Left, Right?

The recent surge in interest in Nominal GDP Targeting, as an alternative to money targeting or inflation targeting if the central bank is to commit to a nominal target of some sort, has prompted some pushback.   This is not surprising.  But one of the responses is most peculiar.  This is the allegation (1) that the surge comes from liberals opportunistically adopting an idea that was originally proposed by conservatives, and (2) that they will not stick with this “fad” in the longer run because it is only designed to fit current circumstances of high unemployment and low output.   Remarkably, every component of this argument is wrong.

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Central Banks Can Phase in Nominal GDP Targets without Losing the Inflation Anchor

      The time is right for the world’s major central banks to reconsider the framework they use in conducting monetary policy. The US Federal Reserve and the European Central Bank are grappling with sustained economic weakness, despite years of low interest rates. In Japan, Shinzō Abe of the Liberal Democratic Party’s (LDP) was elected prime minister December 16 on a platform of switching to a new, more expansionary, monetary policy.  Mark Carney, the incoming governor of the Bank of England, has made clear that he is open to new thinking

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Nominal GDP Targeting Could Take the Place of Inflation Targeting

In my preceding blogpost, I argued that the developments of the last five years have sharply pointed up the limitations of Inflation Targeting (IT), much as the currency crises of the 1990s dramatized the vulnerability of exchange rate targeting and the velocity shocks of the 1980s killed money supply targeting.   But if IT is dead, what is to take its place as an intermediate target that central banks can use to anchor expectations?

The leading candidate to take the position of preferred nominal anchor is probably Nominal GDP Targeting.  It has gained popularity rather suddenly, over the last year.  But the idea is not new.  It had been a candidate to succeed money targeting in the 1980s, because it did not share the latter’s vulnerability to shifts in money demand.  Under certain conditions, it dominates not only a money target (due to velocity shocks) but also an exchange rate target  (if exchange rate shocks are large) and a price level target (if supply shocks are large).   First proposed by James Meade (1978), it attracted the interest in the 1980s of such eminent economists as Jim Tobin (1983), Charlie Bean (1983), Bob Gordon (1985), Ken West (1986), Martin Feldstein & Jim Stock (1994), Bob Hall & Greg Mankiw (1994), Ben McCallum (1987, 1999), and others.

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