2011-10-13

A less scary leap for central banks

Central banks tend to be conservative, and for good reasons. The arguments for switching over to NGDP level targeting are also good. But are they convincing enough? Perhaps a safer compromise could be easier to adopt.

How about a long term ngdp level target combined with a moving short term inflation target? This way the central bank would still be able to use old familiar tools like the Taylor rule while getting some of the benefits of an ngdp level target. Here's a simple example of how it could work.

We start off with a 2% inflation target and forget everything about full employment. The inflation target is evaluated once a year. Let's say NGDP is x% above trend. The inflation target would then be changed to 2 - 0.2x. So if NGDP is 10% below trend, we would aim for 4% inflation.

2 comments:

  1. Glad to see someone new addressing the NGDP topic. My own view is that now we need to go hot and heavy into NGDP targeting, no holds barred. Put the pedal to the metal and close your eyes.

    You may to to add more Market Monetarists to your blog roll and tell us who you are.

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  2. I would also prefer a strict ngdp level target. But that's not very likely to happen in the next few years. That's why I suggested this hybrid version.

    I'm just a Sumner fan boy. I created http://www.ngdp.info earlier.

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