In the post on NGDP targeting I was in fact thinking about level targeting, and Gregor Bush’s last sentence gets to—in fact is—the heart of our disagreement. I am just not willing to concede that anchoring long-term inflation by saying something like “2 percent, 3 percent, whatever” is the path to sustaining central bank credibility. Over the longer term, inflation is the only thing that monetary policy can reliably deliver, as the Federal Open Market Committee (FOMC) has clearly articulated in its statement of longer-run goals and policy strategy:
I suppose I’ve also said that inflation is all the Fed can control in the long run. But when an economist makes that claim, they implicitly mean “any nominal aggregate,” not inflation per se. So I’m puzzled by the way Altig phrases this, as if it’s an argument against NGDPLT.
But let’s say I’m misreading him on that narrow point. Suppose he does agree that NGDPLT is an alternative feasible target. What about the claim that inflation credibility is important to a central bank?
I’d argue that some sort of nominal anchor is important, but it need not be inflation. The real argument here is which of the following two is better:
1. Unstable inflation and stable NGDP growth
2. Stable inflation and unstable NGDP growth.
I’ve often argued that number one is better, for two reasons:
1. Almost all the welfare problems allegedly caused by unstable inflation are, on closer inspection, actually more closely correlated with unstable NGDP.
2. Almost all the welfare problems allegedly caused by changes in the trend rate of inflation are, on closer inspection, caused by changes in the trend rate of NGDP growth.
These include labor market disequilibrium, lender/borrower unfairness, excess taxes on savings and investment due to high inflation/nominal yields, etc.
One possible exception is menu costs of price changes. But the differences there are slight and NGDP targeting might better stabilize input prices, especially wages.
NGDPLT also has the advantage of eliminating the perceived need for suboptimal fiscal stimulus/bailouts, etc.
It’s not about credibility. It’s not about which variable can the Fed control in the long run. It’s about whether the economy does better on a stable inflation (or price level) path, or a stable NGDP path.