No Comments

Via Scott Sumner comes the following primer on NGDP targeting.

Its a cool little explanation of the benefits, and the functioning of monetary policy – specifically through expectations.  I also appreciated that Hayek was mentioned – Hayek was a fan of the nominal income rule, a fact many people don’t realise given belief that NGDP targeting is “left wing” and Hayek is “right wing”.  Economists are never as simple as we like them to be :D

As I’ve said before I don’t agree with NGDP targeting for NZ at the moment.  I see NGDP targeting vs flexible inflation targeting as akin to the level vs growth targeting – and I’m still on the side of rate of change targeting.  However, it is an area where I could easily be turned around … and if NZ was to introduce NGDP targeting I wouldn’t suddenly get all wound up and talking about it being the end of the world, I would assume that we were following the policy rule because our view of what target best represents “good policy” has changed.

For those wondering, if you target a “level” then previous “policy failure” counts – in a NGDP targeting framework, changes in the terms of trade (for example) will be picked up as policy failure in a way that would elicit a response when they “shouldn’t”.  This is why I prefer inflation targeting based on a clear version of inflation like the dynamic factor model the RBNZ has.  However, even in this case we may decide that nominal income growth is a better target than price growth – that is an issue I’d like to spend more time thinking about.

A big thing for me is that we stick to a time consistent rule, instead of falling into the trap of thinking we can hide taxation through central bank actions ;)