Tuesday, 1 November 2011

Monetary Policy - Brief NGDP Target Update

So a bit more reading around the nominal GDP targeting approach reveals that there are a few different arguments pro/counter:


1. Expectations in a liquidity trap are of future loose policy
2. Provides 'political cover' for extreme Central Bank intervention via QE and higher inflation targets.
3. Nominal GDP Targeting performs better when hit by supply side price shocks.

1. NGDP Targets do badly at handling persistent supply side technology shocks (think RBC)
2. NGDP is more complex than Inflation as a target. If analysis of the model implies consumers/businesses looking to the future, seeing loose monetary policy and therefore adapting today's purchase decisions, then agents in the model have to understand how the model works. If they don't then who knows what could happen to expectations, and hence, outcomes?

But then as a counter to the Con, don't most RBC/Chicago guys think prices are basically flexible and therefore monetary policy is basically ineffective & the economy more or less is always at social optimum? In which case, presumable they're not much bothered about Monetary Policy (although obviously fiscal policy has been attacked on very thin theoretical grounds by Cochrane and Fama -basically a crowding out argument, but badly made-).

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