Jeffrey Frankel sees which way the wind is blowing:
One candidate to succeed IT as the preferred nominal monetary-policy anchor has lately received some enthusiastic support in the economic blogosphere: nominal GDP targeting. The idea is not new. It had been a candidate to succeed money-supply targeting in the 1980’s, since it did not share the latter’s vulnerability to so-called velocity shocks.
Nominal GDP targeting was not adopted then, but now it is back. Its fans point out that, unlike IT, it would not cause excessive tightening in response to adverse supply shocks. Nominal GDP targeting stabilizes demand – the most that can be asked of monetary policy. An adverse supply shock is automatically divided equally between inflation and real GDP, which is pretty much what a central bank with discretion would do anyway.
A dark-horse candidate is product-price targeting, which would focus on stabilizing an index of producer prices rather than an index of consumer prices. Unlike IT, it would not dictate a perverse response to terms-of-trade shocks.
Supporters of both nominal GDP targeting and product-price targeting claim that IT sometimes gave the public the misleading impression that it would stabilize the cost of living, even in the face of supply shocks or terms-of trade-shocks, over which it had no control.
The GDP deflator is one example of a product-price index.
We aren’t going to win the battle this cycle, but just watch next time the economy goes into recession. You won’t see the central banks ignoring NGDP like they did in 2008.
HT: Marcus Nunes, Wadolowski, Jim Glass
Update: I just saw over at Matt Yglesias that the two Fed seats will be filled today. It’s a disgrace that President Obama left so many Fed seats empty for so long. I can’t help but think that Larry Summers did not impress upon Obama the importance monetary stimulus (given that he never talks about it in his public remarks.)