I’ve had a lot of questions about NGDP futures targeting, and so I thought I should do a post answering some of those questions.  My preferred target is a 5% NGDP growth trajectory (aka level targeting) but to keep the discussion manageable I’d like to put off practical questions about which target, which time period, levels vs growth rates, etc.  Let’s just focus on the core concept.  Will it work?  By “work,” I mean would it have prevented the crash of 2008?  I say yes.

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Paul Krugman says yes, and when I first read his post I thought he was right.  Now I’m not so sure.

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I am a product of the 1970s, with a visceral distaste for inflation.  Yet despite the massive budget deficits and doubling of the monetary base, I am for some strange reason worried about excessively low inflation, rather than high inflation.  Why?

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Japan has experienced near continuous deflation in its GDP deflator since 1994, averaging about -1% per year.  As I recall there were small positive upticks around 1996 and 2008, but I believe they are back in deflation.  Paul Krugman was one of the first to address the Japanese situation, and also to understand the importance of an aggressive monetary policy.  Here is what he had to say in 1999 about fiscal stimulus in Japan:

I have been wrong about a lot of things lately. . . . Of course, Japan could surprise us all. Perhaps this time massive fiscal deficits will not only keep the economy afloat, but provide the long-awaited, never-delivered jump-start: the self-sustaining expansion in private demand that continues even as the public works programs wind down. But to believe in that jump-start you must believe in a very exotic model of the macroeconomy, one in which there are multiple equilibria and a temporary fiscal expansion can jolt the economy out of a low-level trap. Well, maybe. But isn’t it funny that the orthodox policy now being followed can be justified only by invoking highly speculative, dubious models with little empirical backing; whereas the radical, unorthodox policy I have advocated flows naturally from textbook economics?

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Nick Rowe has some very useful info on the Canadian banking system.  I heard on NPR that during this crisis Canada went from having zero of the top 50, to having 5 of the top 50 banks in the world (in market cap.)  And they have only 33 million people.  I am a pragmatist, so that sounds like a good system.  Even the one regulation that is tighter (capital requirements) makes sense given the moral hazard from FDIC, too big too fail, etc.  Seems Obama is also a big fan of the Canadian system.  Maybe he’s a pragmatist too (let’s hope so.)

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