Here’s a new idea discussed in the Financial Times:
Nominal consumption, not nominal GDP?
Nathan Sheets, head of the Fed’s international division until August, clearly plans to enjoy his freedom as head of international economics at Citi. In a new note he proposes a fairly dramatic communications option for the Fed – setting a target for the level of nominal consumption – which is definitely not the kind of thing you’re allowed to say in public when you work at the Federal Reserve Board.
As Mr Sheets notes, the Fed has ruled out any dramatic changes to its framework for the time being, but “our view is that in the event of a sizable financial shock from Europe—or evidence that the economy was slipping into recession—the Fed would be looking for a ‘bazooka,’ and such a regime would again be considered”.
Lots of commenters were skeptical last week when I said this:
It’s now quite possible that the Fed may have to move toward NGDP targeting before they would have liked. The Fed cannot allow another collapse of NGDP like we saw in 2009. The cost in terms of banking distress, worsening public finances, international discord and mass unemployment is simply too great to contemplate. I have no doubt that Ben Bernanke of all people understands this.
Perhaps the Europeans will come together and do something dramatic in the next few days. But if not, the Fed must be prepared to hold an emergency meeting and do whatever it takes.
Commenters argued that the Fed had just decided against doing NGDP targeting. I had no basis for claiming that it might be on the agenda. Now a Fed insider is saying the same thing—a euro crisis could force immediate action.
Yes, nominal consumption is slightly different from NGDP. But once it gets to the point were we are debating which type of NDP targeting, then the game is almost over.
HT: Christopher Mahoney, David Levey.