Goodhart’s Law and NGDP targeting

A commenter named Rob recently asked me this question:

Scott, long-time reader, first time commenter. How do you respond to the criticism, raised both in the comments on MR and somewhere else I can’t remember, that the problem with Sumnerianism is Goodhart’s Law? If the Fed targets NGDP, then NGDP will lose its significance as the relevant indicator-or something like that.

Goodhart’s Law is sort of a humorous riff on the Lucas Critique.  It says that as soon as the central bank adopts a particular intermediate target, then the relationship between that target variable and the policy goal will breakdown.  Thus suppose economists found that M2 was highly correlated with NGDP.  If the Fed began targeting M2, then according to Goodhart’s Law M2 velocity would suddenly become more unstable.  Goodhart’s Law is one of the strongest arguments for NGDP targeting, which is why I wanted to answer these scurrilous charges in a new post.
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