Nominal income target

A nominal income target is a potential policy conducted by a central bank to target the future level^[1] of economic activity in nominal terms (ie. not adjusted for inflation). The central bank could target Gross domestic product (NGDP) or Gross domestic income (GDI) numbers^[2]) and use monetary policy, both conventional open market operations and unconventional tools, such as quantitative easing, to hit the target.

Mechanism

The central bank using the above tools specifies the economic activity of all final goods and services produced within a country in a given period without adjusting for changes in the price level (inflation/deflation). At regular intervals, such as calendar quarters, a target level for nominal Gross Domestic Product is specified, with the levels growing at a steady rates.^[3] Proponents (see Market monetarism) contend this will reduce fluctuations in economic growth, both positive and negative. In recovery from a recession, market monetarists believe excessive worry about inflation is unjustified and policy should instead focus on returning the economy to a normal growth path.

Market monetarists are skeptical of traditional monetarists' use of monetary aggregates as tools for policy instruments and prefer to use forward-looking markets as a tool to evaluate current monetary policy.^[4] Market monetarists advocate for a level nominal GDP target as a monetary policy rule because it simultaneously addresses the price level and growth in an economy.^[5]

Monetary policy which would ensure a NGDP expectation is met (eg. a level that reflects 5% NGDP growth from a normal trendline) by definition avoids recessions in nominal terms, and by maintaining aggregate demand also avoids deep recessions in real terms. The common target of five percent growth is often selected as it comprises three percent real growth (the historical average growth rate during the great moderation) and two percent inflation (as currently targeted by many central banks.^[6] An alternative target of three percent is sometimes proposed with nominal growth mirroring the real growth rate, and hence zero inflation. This target has the potential downside of being deflationary if real growth exceeds the three percent growth in nominal terms, implying a negative rate of inflation (ie. deflation).

Because GDP and GDI figures come in after the actual economic activity has occurred, a future estimate is required; a potential option for the expected future estimate is to create an NGDP futures market and allow the market to indicate expected demand for money. The central bank would then conduct operations to move the futures price onto its target level, analogous to what it now does with the federal funds rate.

Level Target

When supply or demand shocks or policy errors push NGDP growth above or below the target, market monetarists argue that the bank should target the level rather than the rate of growth of NGDP. So if a recession pushes NGDP to 2% for one year, the bank should add the shortfall to the next year's target to return the economy to trend growth.^[7]

Related policy and discussion by Central Banks

As of 2011, it is thought^[8] that the Bank of England is targeting nominal income and not inflation (at least in the short term), as inflation is greater than one percent above its target, and income is growing at nearly five percent.^[9]

The Federal Open Market Committee of the US Federal reserve also has discussed the possibility of a nominal income target on September 21, 2010.^[10]

The Reserve Bank of New Zealand, the pioneer of inflation targetting, responded directly to a Scott Sumner report on Income targetting, stating "The Reserve Bank said that nominal GDP targeting was a complex, technical approach to monetary policy. GDP was subject to large revisions, making policy difficult to communicate."^[11]

Supporters

As of Fall 2011, the number and influence of economists who supported this aproach was growing. The leading proponent was Scott Sumner, with his blog "The Money Illusion.^[12] Supporters include the aforementioned Lars Christensen, with "The Market Monetarist," Marcus Nunes, with "Historinhas," David Glasner with "Uneasy Money," Josh Hendrickson, with "The Everyday Economist," David Beckworth, "Macro and Other Market Musings," and Bill Woolsey with "Monetary Freedom". Supporters of Nominal income targetting often self identify as market monetarists although market monetarism could be construed as a broader term.

References

1. ^ http://www.scribd.com/doc/69165529/Goldman-Sachs-Recommends-Fed-Boost-the-Economy
2. ^ http://ftalphaville.ft.com/blog/2011/09/26/683896/the-case-for-gdi-a-qa-with-jeremy-nalewaik/ GDI is thought to be a more accurate measure
3. ^ Changing target Should the Fed target nominal GDP? Title: Changing target Publication: The Economist Publisher: The Economist Newspaper Limited Date: Aug 27, 2011
4. ^ Market Monetarism: The Second Monetarist Counter Revolution
5. ^ Why a NGDP (Nominal Gross Domestic Product) Level Target Trumps a Price Level Target
6. ^ http://www.centralbanknews.info/p/inflation-targets.html
7. ^ Sumner 2011
8. ^ http://blogs.telegraph.co.uk/finance/jeremywarner/100011568/bank-comes-close-to-admitting-its-targeting-nominal-gdp-growth/
9. ^ http://www.bankofengland.co.uk/monetarypolicy/pdf/cpiletter110816.pdf
10. ^ "Minutes of the Federal Open Market Committee". September 21, 2010. http://www.federalreserve.gov/newsevents/press/monetary/fomcminutes20100921.pdf. Retrieved October 18, 2011. 
11. ^ http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10719621 RBNZ defends monetary policy target
12. ^ Sumner 2011

External links

• Beckworth, David (August 16, 2011). "How Would Monetary Stimulus Help". http://macromarketmusings.blogspot.com/2011/08/how-would-monetary-stimulus-help.html. Retrieved October 23, 2011. 
• Ponnuru, Ramesh (November 12, 2010). "Hard Money". National Review Online. http://www.nationalreview.com/articles/253160/hard-money-ramesh-ponnuru. Retrieved October 23, 2011. 
• "Changing target". The Economist. Aug 27, 2011. http://www.economist.com/node/21526886. Retrieved October 23, 2011. 
• McCallum, Bennett (October 21, 2011). "Nominal GDP Targeting". Shadow Open Market Committee. http://shadowfed.org/wp-content/uploads/2011/10/McCallum-SOMCOct2011.pdf. Retrieved October 26, 2011. 
• Romer, Christina D. (October 29, 2011). "Dear Ben: It’s Time for Your Volcker Moment". The New York Times. http://www.nytimes.com/2011/10/30/business/economy/ben-bernanke-needs-a-volcker-moment.html?_r=1. Retrieved October 31, 2011.