Level targeting or bust

There’s some recent speculation that the new British leader might opt for NGDP targeting:

Andrew Bailey would be told to abandon the Bank of England’s 2pc inflation target under a radical plan to reform its mandate and boost the economy.

Mr Bailey, the Bank’s Governor, may be ordered to target nominal GDP in future – the size of the economy in cash terms – instead of seeking to keep inflation at 2pc, under plans being floated by allies of the Tory leadership frontrunner Liz Truss.

That might be good news, but as always the devil is in the details. I’ve always said that 90% of the benefit of shifting to NGDPLT comes from the level targeting part of the policy regime, and 10% comes from the NGDP part. Thus it is essential, and I mean essential, that any NGDP targeting regime involve level targeting.

For instance, NGDP growth rate targeting might not have prevented the Great Recession, whereas NGDPLT would have turned the Great Recession into (at most) a brief and very mild recession. Level targeting is that important.

If anyone listening out there has the ear of the new UK government, I implore you to emphasize the importance of the level targeting part of the NGDPLT regime.

Nonetheless, even a move to NGDP growth rate targeting could be considered good news, if it means were are gradually moving toward the ultimate goal of NGDPLT.



10 Responses to “Level targeting or bust”

  1. Gravatar of David S David S
    6. August 2022 at 21:44

    Scott, thank you for posting on England—I had been hoping you would. I found it curious that the article about possible BoE actions doesn’t mention Brexit at all. Can even the most prudent monetary policy offset the continued rot of the Boris Johnson junta? Currently, the British seem to be suffering from their proximity to events in continental Europe, but can reap none of the benefits of the European Union, particularly the relative stability of LaGarde’s monetary management.

    At least the Brits aren’t getting monetary policy advice from Erdogan.

  2. Gravatar of James Alexander James Alexander
    6. August 2022 at 22:09

    Yes, it’s about Levels, and thus trends. But it is also about EXPECTATIONS. Just like 2% inflation targeting sort of works by managing inflation expectations, so NGDPLT would work by managing NGDPLT expectations.

    Sadly, nowhere in the world has an NGDP growth or Level expectations market, as we Market Monetarists know all too well. One would need to be/should be created.

    And, also the pretty hopeless state of NGDP data production (in the UK at least) would have to be sorted. It’s produced soooo late, and by inflating RGDP – as opposed to deflating NGDP.

    All focus at the ONS has been on getting quick RGDP monthly numbers. The ONS actually seems to object in principal to Nominal GDP as not a proper, real, number. Just go digging into how the ONS stubbornly believes in the GDP(O) method well above the US GDP(E) and GDP(I) ones.

  3. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    7. August 2022 at 05:38

    The monetary authorities just don’t get the benefits of N-gDp targeting.

    Authorized for public release by the FOMC Secretariat on 1/14/2022

    “With a sufficiently large quantity of reserves in the banking system, the Federal Reserve could choose to set reserve requirements to zero as they are not needed for interest rate control.”

  4. Gravatar of Todd Ramsey Todd Ramsey
    7. August 2022 at 05:57

    Congratulations on your part in moving the Overton window!

    I hope you will continue to advance your cause by describing, in lay terms, how NGDP futures securities should be structured to inspire a thick, liquid market for NGDP futures securities. Ideally, including details about what specific metric for NGDP to use; what time period should be targeted; how the Fed would participate in the market; and what, if anything, would change for truly extraordinary shocks like COVID-19.

    I believe you wrote an academic paper on a NGDP futures market, but few policymakers and pundits will take the time to understand your paper. Taking the time to explain to lay people may accelerate adoption of a NGDP futures market.

  5. Gravatar of ssumner ssumner
    7. August 2022 at 07:50

    David, Yes, Brexit was an own goal.

    James, Yes, the NGDP data process in the UK seems completely messed up. How is it even possible to compute RGDP before NGDP? It makes no sense. They need to fix that before even thinking about NGDP targeting.

  6. Gravatar of James Alexander James Alexander
    7. August 2022 at 12:29

    The ONS seems to think the purest and best way is the GDP (O) method, ie the “watching at the factory gate method”. It thinks it can calculate real output, by counting, oil pumped, cars made, services provided, and then adding values as a second step. But you can’t count what teachers, nurses, lawyers, bankers, programmers produce. The ONS frequently use as a proxy for service sector output the numbers of teachers or nurses or bankers or lawyers or programmers employed. The service sector is 77% of the UK economy, so read this and weep:

  7. Gravatar of William Peden William Peden
    7. August 2022 at 12:52

    James Alexander,

    Very useful info., thanks! An appalling situation.

    One thing the UK government apparently does track well is Divisia money. It’s now suggesting that monetary policy is about right for a medium-term stabilisation, with a short-term recession. The Bank of England shouldn’t tighten significantly further:


    High inflation will reduce the demand for money, but this will smooth the path to low inflation.

  8. Gravatar of James Alexander James Alexander
    8. August 2022 at 05:11

    Thanks. The yield curve suggests little or no more rate rises. We have a lot of stuff indexed to CPI (and even old, higher, RPI), so once you get some excess inflation it is harder to eradicate. Supply shocks from energy (war), covid and botched Brexit don’t help at all – but should all be one-offs.

  9. Gravatar of ssumner ssumner
    8. August 2022 at 07:56

    Thanks James, So the UK government doesn’t not directly measure NGDP at all? They indirectly estimate it from quantities? Yikes!

    What’s happening to British hourly wages? That will tell you how hard it will be to control.

  10. Gravatar of James Alexander James Alexander
    8. August 2022 at 10:49

    UK doesn’t publish monthly AHE, only AWE. They could do as they also measure weekly hours worked on a monthly basis. Rising 4.2%-6.3%, regular and total respectively. Private total rising at 7.2%, public sector at 1.5% – hence trouble ahead.


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