I don't have an answer to that question. The politics of NGDP targeting doesn't make any sense to me. I don't understand it at all.
Central banks have to do something. They can't do nothing. Whatever would "doing nothing" mean? Let's make it really simple. There are three choices. At one extreme, the central bank can choose a horizontal AD curve, by targeting inflation or the price level. At the other extreme the central bank can choose a vertical AD curve, by targeting real output ("full-employment" output). And exactly halfway in between the central bank chooses a downward-sloping (rectangular hyperbola) AD curve, by targeting Nominal GDP.
NGDP equals the price level times real output. In logs, NGDP equals the price level plus real output. The growth rate of NGDP equals the rate of inflation plus the growth rate of real output. In logs, NGDP equals the price level plus employment plus labour productivity. The growth rate of NGDP equals the rate of inflation plus the growth rate in employment plus the growth rate in labour productivity. What more can I say? Any way you look at it, NGDP targeting is halfway between those who want the central bank to look only at inflation and those who want the central bank to look only at output (or employment).
So, if you line up those three different targets for monetary policy, with inflation targeting at one end, a full-employment target at the other end, and an NGDP target in the middle, which would be the right and left ends? The answer is obvious. I can't think of any right wing economist (or even any right-wing non-economist) who wants the central bank to make the AD curve vertical by targeting full employment output. Zero righties on that end of the spectrum. But I think there are still a few die-hard lefty economists (and lots more lefty non-economists) who never got the memo from Phelps, Friedman, or the experience of the 1970's, and who want a vertical AD curve. And there are many more moderate lefties who did get the memo but don't like inflation targeting because it doesn't pay enough attention to unemployment.
So, the horizontal AD curve (targeting inflation) should be at the right end of the political spectrum, and the vertical AD curve (targeting "full-employment" output) should be at the left end of the political spectrum. With NGDP targeting in the middle.
So this is what you would expect to see:
The righties should all be supporting inflation targeting or price level targeting.
The lefties who got the Phelps/Friedman/1970's memo should all be supporting NGDP targeting.
The lefties who didn't get the Phelps/Friedman/1970's memo should at least be supporting NGDP targeting as at least being a step in the right (i.e. left) direction and giving them half of what they want.
Yet NGDP targeting seems to be associated with right-of-centre economists, with some left-of-centre economists like Brad DeLong and Paul Krugman coming on board the righty train. I think I understand where Brad and Paul are coming from, and their position makes sense to me. But where are the rest of the lefties? Why aren't they the ones doing all the pushing for NGDP, trying to convince righties like Scott Sumner to come on board the lefty train? Why aren't the Canadian lefties at The Progressive Economics Forum the ones pushing for NGDP?
Plus, even if you ignore the stuff about the slope of the AD curve, lefties are supposed to be the ones pushing radical new ideas anyway. With righties defending the boring old inflation targeting status quo. The lefties seem more keen on targeting a 1% minority than 5% NGDP.
This doesn't make any sense to me at all. It should all be the other way around.
Worthwhile Canadian Initiative 
“”A lot?” Who? Which blogs? “Obsession?” This is the problem with a certain segment of the left. I don’t know their numbers I think Stiglitz shares this view. Doug Henwood says “devaluation is the lazy way” to get back to full employment.”
why did you ask this question as if dan didn’t have any ‘who’ and then proceed to name ‘who’?
Targeting NGDP is also targeting nominal income, which you would think would make it an easier “lefty” sell. I find this debate a bit odd in another way, in that inflation targeting was introduced in Australia under a centre-left government (the Keating ALP Government). It was made explicitly business-cycle flexible under a centre-right government (the Howard-Costello Coalition Government). An “average over the business cycle” inflation target is very similar to a NGDP target anyway. But fiscal policy under both sides of politics has become significantly about keeping the policy space “open” for the Reserve Bank.
And yes, that does mean government spending becomes more “cost-benefit” focused, but that actually tends to work better for lower-income groups, their benefit being taken to be a positive. It is just part of my puzzlement about why there is not more learning from the Australian example.
Peter K: Targeting 7% uemployment? 7% the new NAIRU. Who gets to pick which 7% stay unemployed….. oh yeah the market. The same one that chose that 16% are unemployed now. The only unemployment target which makes sense is 0% . The target should be no person who wants to do something to earn some spending money will be denied that opportunity. Why picka target other than 0 . Maybe you dont make it but set your aim high. Its impossible to overshoot 0% unemployment.
Nick
You said earlier you were simplifying and not subtracting anything form my thought experiment. You said
“10 people all consuming all their income, and saving nothing. Then one guy appears with a printing press. He prints off some money and lends it to one of the 10. Now we have a monetary hot potato, because the guy that borrowed the money (presumably) wants to spend it, not leave it sitting in his pocket. Standard monetary disequilibrium analysis.”
If you are consuming all your income, why would you take on a loan, even an interest free one? You must have extra income in order to take on a loan. A guy with a printing press making a loan (never mind that printing money means NOT loaning it but giving it) would have no takers in my scenario………. until someone figured how to consume less and save some money, but then all they need is bank loan against that future income. We dont have a hot potato because no one would take the guy up on his offer as you described it. But again, my point was about what is the basic nature of a bank loan, which is NOT a saver lending his money to someone who wants more. I’m still not sure what point you were driving at with thisaddition.
So what? That’s preposterous, cutting out the middle man is the whole point! In that simple world sure everything works but to then transpose that outside of your academic office is not possible.
Commercial banks do not need the central bank (reserves) to lend money so whats the point? If central bank does this or not, bank reserves go nowhere other than between commercial banks.
Scott Fullwiler has painstakingly detailed the operational reality.
For me the basic objection is the objectification of money. Money is a great tool but that is all it is and by placing so much of our thought and desires on it we’ve distorted its purpose. NGDP while a slightly different approach to now (which is abysmal) still focuses on the object. Its like Christians who want to talk about the Bile as if the Bible is the object of their worship. The Bible may point to the object of worship but it undoubtedly is a lousy item TO worship.
Monetarists are obsessed with money. I would prefer an obsession with improving human lives which can be done with the dollar worth 6 Euros or 600 Euros.
Frances Woolley: “Nick – which begs the question – are you a leftie economist or a rightie economist? Or do you just enjoy blasting away the conventional wisdom whatever it happens to be?”
Isn’t Nick a kung-fu economist?
Left? Right? What foolishness!
Om. All skandhas are empty. Om.
I’m amazed that there is such a consensus around NGDPT.
– Leftists should be saying that monetary policy will not work in a liquidity trap and what we need is fiscal policy that is sure to work
– Rightists should be saying that huge monetary expansion is just kicking the can and what we need is real supply-side change to address the problems that caused the liquidity trap in the first place,
The real consensus is that both sides should indeed be calling on the CB to “do nothing”.
“Charlie Evans of the Chicago Fed suggests targeting 3 percent inflation and 7 percent unemployment and I would support that as well.”
Oh brother, in the Full Employment and Balanced Growth Act of 1978, Congress set the inflation target as not more than 3% and the unemployment target as not more than 4%. (15 USC 1022a). But when has the Fed ever paid attention to Congress?
“Its impossible to overshoot 0% unemployment.”
True enough but it occurred to me the other day (as I was reading a Max Hastings book) that 1944’s 1.2% unemployment rate might actually have been a negative number if the half a million German and Italian POWs working as farm laborers were counted as employed.
The meeting of the minds between MM and MMT (as I suggested at interfluidity) is for the Fed to buy up long-bonds and for Tsy, in term, to buy them back with coin seigniorage. After $5 trillion in platinum coins had been deposited with the Fed, the public debt would be no higher than it was when Obama took office. Doesn’t do much in terms of fiscal policy, except that being $5T below the debt ceiling is not nothing.
That’s part of what I was saying. We may need a monetary policy, but it’s very premature to say what it should be, because the real problems are orthogonal to monetary policy. They’re ones that leftazoids are concerned with, and from the point of view of mainstream economists, that makes leftazoids the children of a lesser god, intellectually speaking.
But the Euro crisis is showing to us daily that this god is a wrathful god indeed and won’t be satisfied with just an occasional genuflection from Nick.
Targeting 7% uemployment? 7% the new NAIRU.
What happened to the old NAIRU? Oh yeah, a few insolvent banks and whoops!
NAIRU: If there’s unemployment it’s not our fault and if unemployment rises NAIRU changes so it wasn’t us, honest.
No wonder central bankers love NAIRU. They don’t have to take the blame for anything.
Could someone explain to me how monetary policy can target unemployment? Like Nick, I got that memo from the 1970s and 1980s that explained – pretty convincingly – that it cannot. Apparently I’m not up as up-to-date on these things as I once was.
By the way, there’s a large amount of leftist writing particularly from the 90s that is about a vehement rejection of the 70s and 80s/Friedman memo to which I believe you have been referring. Linda McQuaig’s book The Cult of Impotence for example. So no, not everyone got the Friedman memo. I mean, that memo is one of the things for which Friedman is principally hated.
Plus that’s kind of half the point of the whole MMT tendency, which isn’t strictly leftist, but still makes a sympathetic point.
Stephen: It’s called a “Taylor rule”
“why did you ask this question as if dan didn’t have any ‘who’ and then proceed to name ‘who’?”
I was making 2 guesses. Just trying to be helpful. Dan never links to anybody and yet routinely asserts that “a lot” of people on the left think as he does.
K: The Taylor Rule is for targeting inflation.
Peter K, I can’t give you any poll numbers. But it was always my impression that many on the left revere the tradition of FDR, Keynes and the New Deal, and long for a return to more activist government and renewed reliance on big, powerful fiscal policy tools.
Monetarism is a trickier issue, because it is more of a purely economic theory than a political orientation. But most people associate monetarism with Milton Friedman and other conservative and laissez faire Chicago school thinkers, both of which have long been the objects of the ire of the left. And one thing the large swathe of left-leaning economists who incline toward the various post-Keynesian schools seem to have in common is a commitment to models of endogenous money creation and the idea that bank lending and government spending drive money creation, which the central bank then merely accommodates, rather then the monetarist and quantity theory picture of central bank policy driving monetary expansion and demand.
This debate has been going on for many months, and all the monetarists can come up with is vague talk about expectations and the “money channel” when asked to get specific about the mechanisms by which their desired “targets” are supposed to turn into real effects on the real economy. Frankly, some of us think that monetarism represents a toolkit of placebos, rain dances and voodoo that amounts to nothing more than an impotent distraction. We don’t think monetarist understand what really makes things happen in the real economy. We don’t think adding more reserves to already swolen bank reserve accounts is going to make the economy move.
I check in on the Market Monetarist blogs all the time. Their audience is not exclusively right-wingers, but it is very predominantly right-wingers. Is that just some kind of coincidence? When Scott Sumner is not busy trumpeting NGDP level targeting, he is busy running down one left-wing policy approach after another.
Why does the left not support NGDP targeting?
Why does the right not support a government-run full employment program?
I agree with JKH at 9.27am yesterday.
And when fiscal and/or monetary policy increases AD to escape the recession, employment rises and real wages fall. If you believe that model, then a fall in real wages is a necessary side-effect of escaping the recession.
Nick, I believe some real wages are sticky, and it all depends on bargaining power. Wages don’t move up because they are goosed by some all-pervasive monetary force. They move up because employers have some incentive to raise them. And the only time employers have an incentive to raise them is if they will lose their employees if they don’t. And in the current circumstance, most people in America do not possess that kind of bargaining power.
It is only the case that a fall in wages is a necessary side effect of ending a recession inside the limited monetarist and neoliberal paradigms of how the economy works, and what policies are morally and politically appropriate. A lot of us just don’t believe that recessions are efficiently ended primarily because something called “monetary policy” increases AD. There are a lot of different ways of ending recessions, but the most direct would be for the government to directly hire everyone who is unemployed. If they do that by pure deficit spending, then they have pursued a fiscal policy with a monetary policy component. But they could also fund the program by taxing away some of the surpluses of the wealthy – surpluses that are contributing little to aggregate demand – and transfer those surpluses to those who certainly will use them to boost aggregate demand.
Now you or some of your readers might be aghast at my shocking disregard for the sanctity of property rights and the efficient wisdom of the price mechanism. Fine. But don’t pretend their is some big mystery about the fact that lefties want a world in which the public sector is very actively involved in the creation of wealth and employment and in the redistribution of wealth and income. That’s what “left” is all about, isn’t it?
As for what the central bank should target, I don’t care all that much. But I am inclined to think they should focus their policy initiatives on interest rates, and on other means of modulating the flow of credit. Interest rates are the one thing I believe they have a demonstrated record of actually controlling.
Gizzard: “Targeting 7% uemployment? 7% the new NAIRU. Who gets to pick which 7% stay unemployed….. oh yeah the market.”
I remember in the late 1980s when the market went crazy if unemployment threatened to go below 7%. 😦 Pricks!
Dan: “Nick, I believe some real wages are sticky,…”
I’m talking about sticky nominal wages, not sticky real wages. W, not W/P. A total failure to communicate. I did try, but I failed completely to get you to understand what i was saying. I despair. Look Dan, I know you are very bright and well-educated, PhD Philosophy, IIRC, but just grab a second year macro textbook and spend the day or two it would take you to read through it, please.
“Oh brother, in the Full Employment and Balanced Growth Act of 1978, Congress set the inflation target as not more than 3% and the unemployment target as not more than 4%. (15 USC 1022a). But when has the Fed ever paid attention to Congress?”
Isn’t that obsolete? Thanks.
Nick I misspoke, but I was clearly talking about sticky nominal wages too. If the price level goes up and some workers do not get a raise, haven’t their nominal wages stayed the same, while their real wages have fallen? And wasn’t that the issue I was discussing? My claim was that, even if we can expect pervasive wage stickiness of this kind in response to a rise in prices – and I think we certainly can expect that given the weak bargaining position of labor – it is not at all necessary for this to be allowed to happen in order to boost employment and end a recession. That is only the case if you restrict the tools used to some combination of inflationist monetary policy and market mechanisms.
And while folks might be running away from this prescription now, it was clearly the prescription we were being presented with by a lot of the NGDP targeters until very recently.
“Isn’t that obsolete? Thanks”
If you mean obsolete as in the military draft (that is, something that was once national policy but Congress has since repealed t), no, the Full Employment Act is still the law of the land (I was citing the title and section of the US Code where you can find it).
If you mean obsolete as in ignored with impunity like, say, the War Powers Act, then you may have a point.
Dan: NGDP targeting is about the slope of the AD curve.
Sticky nominal wages, sticky nominal prices, and what happens to real wages in recessions and booms, are about the slope of the Short Run Aggregate Supply curve.
It doesn’t matter whether the AD curve is vertical, horizontal, or downward-sloping. If you shift the AD curve up/right, it is the the slope of the SRAS curve, and why it has that slope, that tells you what happens to real wages.
What Scott Sumner believes about the SRAS curve, and what I believe about the SRAS curve, are two different things. We have argued about it in the past. So I get pissed off when arrogant people who think they know it all but who have (apparently) never read a basic macro textbook say stuff like:
“And while folks might be running away from this prescription now, it was clearly the prescription we were being presented with by a lot of the NGDP targeters until very recently.”
And the bargaining power stuff is a long run matter that tells you about where the LRAS curve is, and what real wages will be when you are on it.
I’m tired now. But sometimes I feel this is all a complete waste of time.
Dan: “Why does the right not support a government-run full employment program?”
Did you get the Phelps/Friedman/70’s memo? Do you know what I’m talking about?
It’s about the inability of AD policies to get “full employment”. Ever hear about a Conservative politician called Ted Heath? They tried, and failed.
You want to know why I don’t support a full-employment program? Because the lefties go batshit crazy and say I should be dealt with using a baseball bat when I start talking about my full employment program. It’s because you don’t want to hear about it. Because too many of your sacred cows would have to be sacrificed to get it.
Sacred cows like minimum wages, unions, retirement arrangements and progressive income taxes?
Which is shorthand, Nick, for a contention that your full employment program is incapable of dividing the pie equally.
That’s why I don’t want to eat your baking.
Determinant: Nope. Wrong. That’s a knee-jerk response that reflects all of your own prejudices, with zero analysis. Which again, epitomises so much of what is wrong with so many (not all) of the left.
Actually, I remember you posted about your vision for full employment, the “natural rate of unemployment” and how to get rid of it and you launched into something very much like that.
I was just naming my sacred cows that you said had to go and going on my memories of your plan.
So your full-employment plan includes unions, progressive taxes and defined benefit pensions for everyone?
Come now, out with your plan, Nick.
Bill Woolsey said: “Or are you worried about share prices rising enough to make investment profitable.”
I may or may not be reading that correctly but …
Is there a cheaper way for a business to expand than either issuing new bonds or issuing new stock?
From what I have read, NGDP targeting tends to ignore:
1) currency denominated debt (whether private or gov’t)
2) current account deficit
Nick Rowe: “You want to know why I don’t support a full-employment program? Because the lefties go batshit crazy and say I should be dealt with using a baseball bat when I start talking about my full employment program. It’s because you don’t want to hear about it. Because too many of your sacred cows would have to be sacrificed to get it.”
Mmmm. Sounds interesting. 🙂
Stephen: “The Taylor Rule is for targeting inflation.”
If you can’t effect the NAIRU then in the long run I suppose every rule can only target inflation. NGDP targeting is a Taylor rule. Would you call it inflation targeting?
Determinant: “Sacred cows like minimum wages, unions, retirement arrangements and progressive income taxes?”
Nick: “Nope. Wrong. ”
Too bad. Throw in a good citizen’s dividend, scrap UI and welfare, and it sounds to me like a pretty good plan for a zero NAIRU.
So we’ll determine what Nick’s full-employment program is by defining what it is not?
This process of elimination might take a while, so lets get to it!
Is it less like Speenhamland or the workhouse?
http://en.wikipedia.org/wiki/Speenhamland_system
http://en.wikipedia.org/wiki/Workhouse
Determinant: your memory is bad. You are also being obnoxious.
OK, I can’t remember it either. I’m assuming it wasn’t instituting an anarcho-syndicalist society where “employment” and “unemployment” have no meaning, so we have both full and zero employment simultaneously. “Ceci n’est pas un job.”
K: “If you can’t effect the NAIRU then in the long run I suppose every rule can only target inflation.”
Yep. A lot of people don’t get that point. It’s only in the short run that you can talk about the differences between (say) inflation vs NGDP targeting.
“NGDP targeting is a Taylor rule. Would you call it inflation targeting?”
That’s not strictly correct. First, the Taylor Rule is a mechanical rule that tells you how to adjust the instrument in response to only two variables — the inflation gap and the output gap. Inflation targeting lets you look at all information to set E[future inflation] = target. NGDP targeting also lets you look at all information to set E[NGDP] = target. Also, the Taylor Rule takes a weighted average of the output gap and inflation, whereas NGDP is like an average of output (no gap) and the price level.
You can think of a Taylor Rule as a mechanical way to implement flexible inflation targeting. But it will consistently miss the target in the long run if you miss-estimate potential output or the natural rate.
So it really does all center around adoption of the NAIRU concept then, according to you. Another way of putting it is that, according to monetarists, we must always put workers at a disadvantage in bargaining power…
Some data points from the UK… Will Hutton is a British lefty who has advocated for NGDP targeting a couple of times recently:
http://www.guardian.co.uk/business/2011/aug/06/financial-system-a-madhouse
http://www.guardian.co.uk/commentisfree/2011/oct/29/planb-economic-crisis-britain
Giles Wilkes is a centre-leftish economist, advisor to govt cabinet minister Vince Cable, and sometime NGDP advocate:
Click to access credit-where-its-due.pdf
If the (current) UK government did propose NGDP targeting I’m pretty sure that many lefties would intuitively adopt the position that NGDP Targeting = Monetarism = Thatcher = Bad.
We didn’t, in fact, get hyperinflation in the 1970s. And the average real GDP growth rates for the UK in the 70s, 80s, 90s, 00s were as follows: 2.42%, 2.48%, 2.24%, 1.70%. (TBH a big chunk of the 1980s is accounted for by the crazy housing bubble in the last two years of the decade, driven by the monetary policies that gave us the 1990s recession. I wonder what the numbers for the 80s and the 00s would be like with that exed-out.) Also, the UK didn’t get back to the levels of unemployment for which Ted Heath is castigated above until 2004 – rather, we got back to the levels the Wilson/Callaghan government considered a failure in the depths of the 1974 recession, we never got back to the Heath-era level. FRED!
I am far from convinced the “Friedman memo” was anything but a costly and painful detour through the swamps. Given that it didn’t, in fact, deliver higher real GDP growth or lower unemployment or macro stability (see current circumstances), what the fuck is it for? Where is the achievement? It’s a nothingburger at best and at worst, just a cover for picking a higher level of unemployment on the Phillips curve for fundamentally political reasons.
Nick,
I will admit that on economistsview where most of the commenters are left of center, I’m a bit of an exception. And the feeling I have, is that US commenters are obsessed with narrow political bandwidth in the US. The US political system is so disfunctional that any idea of a set of related reforms adding up to an improved whole, is impossible – you need to concentrate on single policies. So they only think in this way – one policy at a time, never in terms of whole system reforms.
Mandos: an awful lot does centre around the NAIRU idea. That’s what makes the vertical AD curve (targeting full-employment output, however you want to define “full employment”) infeasible. NAIRU basically says that the Long Run AS curve is vertical, so if the central bank makes the AD curve vertical too, there’s no long run equilibrium, because the two curves don’t cross. (Except if by absolute total fluke the vertical AD curve is exactly on top of the vertical LRAS curve, in which case every price level and every inflation rate is an equilibrium).
There’s another way to think about the same thing. There are limits to what monetary policy (or any AD policy like fiscal policy) can do. In the long run you can choose any inflation rate or price level you like. In the short run, if you get it right, you can help ameliorate fluctuations in output and employment (and maybe even real wages, though that depends). But you can’t make output and employment permanently higher.
That above paragraph isn’t quite right. Because if you can reduce fluctuations, that in itself might have long run effects on the average level of real income and employment, and real wages. In other words, if you can reduce the amount of “noise” created by AD shocks (and SRAS shocks), that might have beneficial side-effects on long run growth in real income, over and above being a good thing in itself.
Monetary policy, and AD policy in general, is about stabilisation. That’s the consensus Mew Keynesian/Monetarist message. There are some things monetary policy cannot do. And if you want to do them, you need to find some other policy.
Britmouse: Good finds! I knew of Will Hutton, but didn’t know he supported NGDP. I hadn’t heard of Giles Wiles. And by googling, I learn that Vince Cable is the Liberal Democrat cabinet minister. (Left of centre, and in some ways left of Labour?). So there are more sensible lefties out there than I thought. That gives one hope.
Alex: you believe in a stable long run trade-off between inflation and unemployment? Do you have any sort of ballpark idea about the inflation rate that would minimise the unemployment rate in the long run?
reason: yep. The commentary on Mark Thoma’s otherwise excellent (lefty) blog does depress me. And disfunctional US politics depresses me even more. The main reason NGDP is making little headway in Canada is that people can argue that it isn’t much different from flexible inflation targeting, and the latter seems to be working quite well, so why change it? And that’s a sensible argument, even if I think it’s not exactly right.
There is something I do like about NGDP targeting. It’s pretty much the ultimate expression of the logic of Goodhart’s Law and the failure of the monetarists’ intermediate targets. If you want a stable, growing economy, target a stable growth path.
Something else I like about it: it is action, and we need action.
To be honest, though, the first of those points is basically that it’s not counterproductively stupid in principle and the second is just the joke from Yes Minister (“We must do something. This is something. Therefore we must do it!”)
Alex: “To be honest, though, the first of those points is basically that it’s not counterproductively stupid in principle…”
If we could get all our policies to meet that criterion, I think we would be doing rather well. There almost certainly is a better policy than NGDP targeting out there somewhere. It would be a total fluke if one single number could be a sufficient statistic for what monetary policy should be aiming at. But given the current state of our knowledge, my aspirations are not very high.
And BTW, if you did convince me that (say) 8% inflation would be best on average for keeping average unemployment low (with no other bad side effects), I would just say OK, let’s target 11% NGDP growth. My own view is that going below 2% inflation on average could be bad, because of downward nominal wage rigidity, and fear of the ZLB, but I don’t see any benefits from going much higher than 2%, either from theory or from the empirical evidence. In fact, if I just look at the data on unemployment and inflation over any long time period, and forget all about theory, it looks like the Phillips Curve slopes the “wrong” way. High inflation tends to go together with high unemployment. Though that does not imply causation, of course.
How can you believe in NGDP targeting without a tradeoff between inflation and unemployment? I mean, the whole idea is that you have two binding constraints – the lower one is the avoidance of depression, the upper one is some level of inflation that is considered unacceptable (by shut up, because shut up) – and a target between them. If we get too near the lower one, we inflate, if we get too near the upper one, we deflate. How is this not, operationally, a demand management exercise implying a Phillips relationship?
The mechanism of action may be different, but the final goal is to maximise GDP growth(i.e. minimise unemployment) consistent with an inflation level considered (by somebody for some reason) tolerable. Or, if you like, to minimise inflation consistent with a growth level (i.e. unemployment level) considered tolerable (by somebody for some reason).
Very few economists, whatever they claim, don’t believe in some sort of implicit Phillips relationship. The 1980s monetarists and their political fans were always going on about “taking the medicine” and tough measures that would pay off in the future and “yes it hurt, yes it worked”. To put it another way, put up with the unemployment for the sake of lower inflation.
Alex,
I assume that you are British. I don’t know if you are old enough to remember the 1970s, but I am, and I would not like to return there. The inflation was not just a problem in itself, but symptomatic of an attitude that I see in the US today, which was a refusal to accept our structural problems, and to believe that more fiscal stimulus could get us back to prosperity. We may have had low unemployment, but a lot of employment was effectively borrowed from the future by using government aid to prop up redundant industry (coal mines) and create jobs (eg subsidising car plants to start up in depressed areas).
Unfortunately, the lessons from the 1970s seem to have been forgotten in the UK and US, perhaps wilfully by some, and the easy broad solution of a bit more inflation seems to be tempting us again. Although its academic supporters may mean well, I suspect that much of the growing support for NGDP targeting is because it provides intellectual cover for inserting the thin end of the inflation wedge.
We are told that the effect of monetary policy on real activity is temporary and accidental (eg due to sticky prices etc). Given that, I would rather have the central bank focus exclusively on price stability and let, if not force, the elected government to nurture real activity. For example, there are many fiscal measures that the present UK government could take to boost real activity, but avoid because they could involve political cost (eg shifting the burden of taxation from labour income to property).
Alex: “How can you believe in NGDP targeting without a tradeoff between inflation and unemployment?”
Aha! I do believe in a short run Phillips Curve trade-off. In the short run, shifts in the AD curve whether caused by monetary policy or which monetary policy failed to prevent) cause real output and employment to fluctuate. Every Monetarist and New Keynesian believes this (or something very close to this). If I didn’t believe this, my macroeconomics would be very different. I would be a Real Business Cycle theorist instead. I wouldn’t have put forward my slogan “recessions are always and everywhere a monetary phenomenon”. If I didn’t believe this, I really wouldn’t care much about whether we had an NGDP target, a strict inflation target, a gold standard, or targeted the price of fish.
It’s the long run Phillips curve trade-off I (mostly) don’t believe in. Nor does any New Keynesian or Monetarist (roughly speaking). Nor does (hardly) any economist, since about 1980. Before the 70’s, most economists did believe in the long run trade-off.
That’s what the Phelps/Friedman/70’s memo was all about. Short run trade-off, yes, Long run trade-off, no.
Rebel: You’re an old guy, like me! (I left the UK just before the Winter of Discontent, when it all really came to a head). Yep, that lesson is seared in our brains. But we want to be a bit careful not to fight the last war though. There is a chance we might now be overdoing it in the opposite direction. It may be that the natural rate of interest is permanently lower than it was then.
I gather from many British people that the opposite lesson was seared into their heads—never, if you can help it, let Thatcherish people into power.