The Godfather (of nominal GDP targeting) Speaks

The Godfather of nominal GDP targeting has spoken. Bennett McCallum, who has authored numerous academic papers on nominal GDP target and is probably the foremost expert on it, weighs in on the growing attention being given to this approach to monetary policy. An important point that he makes is that a nominal GDP target would be easier to understand by the public than an inflation target:

It seems ironic then that, when academic economists suggested nominal income targeting to Federal Reserve officials in the 1980s, often the main objection put forth was that it would be difficult for the public to understand. But it seems likely that it would be easier for the public to understand nominal GDP growth than a target that includes an unspecified weighted average of an inflation rate and some unreported major adjustment to take account of output and/or unemployment conditions. Indeed, I would argue that “total spending” in the economy is a way of describing nominal GDP that would make that concept at least as easy to understand by average citizens as “core inflation” or even CPI inflation.

I have always believed that marketing a nominal GDP target would be fairly easy for the reasons laid out above. Another way of framing this for the public is to say that the objective of such an approach to monetary policy would be to stabilize nominal income or wage growth (though technically that would require a nominal GDP per capita target). The public understands their current dollar wages far better than the various CPI measures. Thus, selling a NGDP target as a way to stabilize wage growth should have broad appeal. And then there are good macroeconomic reasons to stabilizing nominal wage growth, but that is a topic for another post.

PS. Lars Chrisentensen prefers to call Bennett McCallum the grandfather of Market Monetarism. Meanwhile, Steve Randy Waldman and Kevin Drum say favorable things about nominal GDP targeting.

This post originally appeared at Macro and Other Market Musings and is reproduced with permission.