Monday, March 12, 2012

Mechanisms Behind NGDP Stability

I just wanted to jot this post down so I could remember the over 9000 reasons NGDP targeting is more effective than the alternatives:

Instantaneous - future expectations of nominal GDP determine today's NGDP
Focus on the policy variable - there is no intermediate proxy, ergo hell or high water, the target is hit
Lessens impact of financial crises - as long as expectations are anchored, the biggest failures don't spread throughout the macroeconomy
Resiliency to supply shocks - no overshooting or undershooting compared to an inflation targeting regime
Is "costless" - as compared to fiscal policy, NGDPLT doesn't require sovereign debt
Stable expectations - level targeting has a "memory", so past failures are corrected for
Politics - it's easier to advocate for higher nominal incomes than higher inflation
No impact of inflation on creditors - fundamentally, it's about NGDP.  If it's a real shock, everybody has to bite the bullet
Interest rates - higher NGDP expectations raise the interest rate, allowing more room for conventional monetary policy

3 comments:

  1. Lulu, what does the scouter say about Scott Sumner's power level?

    Sorry, couldn't resist.

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  2. It's growing at 5% per year. Sorry, but gotta have a rule-based super saiyan policy.

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