A flaw in Nominal GDP targeting.

There was a debate on NGDP targeting on Winterspeak’s site recently. One point missing (I think) from that debate (perhaps because it was too obvious) was as follows.

Advocates of NGDP claim that if the authorities concentrate EXCLUSIVELY on inflation, they’ll pitch aggregate demand too low when inflation has a significant cost push element.

As David Beckworth (probably the main high priest of NGDP) says,

“Inflation is the result or symptom of underlying shocks to aggregate demand (AD) and aggregate supply (AS). Monetary policy, however, can only meaningfully influence AD so that is where its focus should be. This cannot happen with strict inflation targeting because it requires the central bank to respond to any change in inflation, regardless of whether it is caused by AD or AS shocks.”

Well the answer to the latter point is that the authorities JUST DON’T concentrate exclusively on inflation: that is, the DO LOOK at the reasons behind inflation.

For example, Britain’s government and central bank think that the current excess levels of UK inflation are to a significant extent cost push and temporary. They are thus doing nothing too drastic to bring down this inflation to the 2% target within the next six months.

I don’t have any big objections to NGDP targeting: I just think it’s merits are exaggerated.

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