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Objecting to Objections to NGDP Targeting

Summary:
Russell Lynch, writing in the Evening Standard, has raised two standard objections to NGDP targets, and they are valid concerns. "One advantage of the current regime is that it is broadly understandable to Joe Public, who’ll most likely grasp Mandarin before nominal GDP."I sympathise with this point and have previously advocated replacing the CPI target with a CPIH to bring the UK in line with other European countries. But at some point we should take a step back and ask whether using less bad inflation proxies is enough. A clear upside of inflation targeting is the ease of communication but this is partly a function of the significant resources that the Bank of England devote to PR. Their schools outreach focuses on “Target 2.0” and this was introduced as part of a swathe of measures to

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Russell Lynch, writing in the Evening Standard, has raised two standard objections to NGDP targets, and they are valid concerns. 

"One advantage of the current regime is that it is broadly understandable to Joe Public, who’ll most likely grasp Mandarin before nominal GDP."

I sympathise with this point and have previously advocated replacing the CPI target with a CPIH to bring the UK in line with other European countries. But at some point we should take a step back and ask whether using less bad inflation proxies is enough. 

A clear upside of inflation targeting is the ease of communication but this is partly a function of the significant resources that the Bank of England devote to PR. Their schools outreach focuses on “Target 2.0” and this was introduced as part of a swathe of measures to educate the public. The reason there’s so much public attention is because that’s the chosen target. 

I’m sure that “inflation” means more to Joe Public than NGDP. But this backfires when Joe Public sees a disjoint between the wage growth experienced, booming asset price boom, and an oscillating CPI measure that the Bank increasingly ignores. If the Bank were really committed to signalling to the public that the 2% target is sincere there would have been a lot more changes in policy since 2008. Ironically the stability praised by commentators is in part a result of ignoring the remit. 

"Second, the benchmark is only as good as the figures on which it is based, which are less frequent than inflation data and prone to revision."

This point neglects the scale of opportunity from switching to an NGDP target. Data revisions matter most when policy is driven by the discretion of policy makers. But part of the argument for abandoning the present regime is to reduce the burden on decision making. The reason the paper discusses prediction markets is to introduce mechanisms that incorporate the collective wisdom of the market. My preferred NGDP regime would be a level target focusing on NGDP expectations. This would be forward looking and less prone to past revisions. But more importantly it would dispense with the monthly meetings where decisions get made. Monetary policy would be continually tied to a fixed nominal target and we could dispense with the apparatus of the chattering news junkies. 

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