If I didn't know any better I'd think that Money Illusion's Scott Sumner is gloating just a little. Still, he can be forgiven I believe. As Krugman puts it: “Market monetarists” like Scott Sumner and David Beckworth are crowing about the new respectability of nominal GDP targeting. And they have a right to be happy."
http://krugman.blogs.nytimes.com/
Sumner and his fellow "Market Monetarists" have for a long time argued that the Fed should put aside it's inflation target in favor of "Nominal Gross Domestic Product" targeting. What's news is that now some Keynesian giants have jumped on board-Krugman and DeLong. So we now have the New Keynesians in with the Market Monetarists. Krugman officially lent his support to this idea-whose time clearly has come-after a major internal memowritten at Goldman Sachs came out that argued for NGDP targeting.
As Krugman points out this is not necessarily the official Goldman position.The Goldman memo: "calls for a nominal GDP target — that is, a future dollar value of GDP — that would in effect both promise a significantly higher inflation rate over the medium term and require very large quantitative easing. We need to be careful about this: it’s a proposal from the excellent Jan Hatzius, not official GS policy. But still."
As the Market Monetarist puts it, "Interestingly enough both Paul Krugman and Brad DeLong have now come out in favour of NGDP level targeting. Hence, the policy recommendation from these two Keynesian giants are the same as from the Market Monetarist bloggers, but even though the Keynesians now agree with our policy recommendation on monetary policy in the US the theoretical differences are still massive. Both Krugman and DeLong stress the need for fiscal easing in the US. Market Monetarists do not think fiscal policy will be efficient and we are in general skeptical about expanding the role of government in the economy."
However, "Despite theoretical differences it is interesting how broad based the support for NGDP level targeting is becoming among US based economists."
A large difference is that the Market Monetarists see aggressive monetary policy as something in place of aggressive fiscal policy. The New Keynesians would prefer both optimally. Brad DeLong argues the two together are what's needed. However as Krugman puts it, " now that we’re almost four years into the Lesser Depression, I’m willing, out of a combination of a sense that support is building for a Fed regime shift and sheer desperation, to support the use of expectations-based monetary policy as our best hope.
"And one thing the market monetarists may have been right about is the usefulness of focusing on nominal GDP. As far as I can see,the underlying economics is about expected inflation; but stating the goal in terms of nominal GDP may nonetheless be a good idea, largely as a selling point, since it (a) is easier to make the case that we’ve fallen far below where we should be and (b) doesn’t sound so scary and anti-social.
I still believe that the chances of success will be a lot larger if we have expansionary fiscal policy too; but by all means let’s try whatever we can."
The hope for this idea it seems to me is that it could get prevent the Fed from focusing on inflation too narrowly. This major convergence of American economists is certainly notable and a good sign that perhaps the Fed will act soon. There is talk that it may be buying more mortgage-backed securities in the future and in particular Bernanke's recent comments about the need to more clearly communicate to the market concerning expectations about future interest rates is a sign this is where the Fed may be going. NGDP would enable the Fed to actually do something for the other side of the dual mandate-employment.
As Chicago Fed Governor Charles Evans said recently, "Let me note several aspects to this policy conditionality. As I just said, I subscribe to a 2 percent target for inflation over the long run. However, given how badly we are doing on our employment mandate, we need to be willing to take a risk on inflation going modestly higher in the short run if that is a consequence of polices aimed at lowering unemployment. With regard to the inflation marker, we have already experienced unduly low inflation of 1 percent; so against an objective of 2 percent, 3 percent inflation would be an equivalent policy loss to what we have already experienced. On the unemployment marker, a decline to 7 percent would be quite helpful. However, weighed against a conservative estimate for the natural rate of unemployment of 6 percent, it still represents a substantial policy loss. Indeed, weighed against a less conservative long-run estimate of the natural rate, it is a larger policy loss than that from 3 percent inflation. Accordingly, these triggers remain quite conservatively tilted in favor of disciplined inflation performance over enhanced growth and employment, and it would not be unreasonable to consider an even lower unemployment threshold before starting policy tightening."
http://www.chicagofed.org/webpages/publications/speeches/2011/10_17_11_mcee.cfm
Something like that would be very salutary I believe. If the Fed were to say,' look we are committed to our inflation target over the longer term but in the short term we have badly missed our full employment target, so there will be no tightening with unemployment over 7 percent' that would do something meaningful about market expectations. Particularly appreciate Evans' pointing out that in reality a 7 percent target is pretty conservative, that it still shows a bias in favor of inflation targeting. Clearly then there is wide convergence among not only the economists but some policy makers both at a bank like Goldman and the Fed. Fingers crossed maybe something will be done soon.
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