The Adam Smith Institute’s latest report, The Case for NGDP Targeting (PDF) by US economist Scott Sumner, argues that that the Bank of England’s inflation targeting regime was proved inadequate by the Great Recession, and should be replaced. Instead of targeting inflation, the Bank of England should target nominal gross domestic product (NGDP). This is sometimes referred to as nominal income targeting.
In making his case, Sumner argues that:
(1) Inflation targeting is flawed because it depends on inflation indices like the Consumer Prices Index. However, such indices are easily swayed by factors such as exchange rates and sales taxes – which may not require a monetary response. Moreover, inflation indices frequently misprice (or overlook altogether) housing. These issues, inter alia, make inflation indices unreliable as a primary target for monetary policy.
(2) NGDP targeting works because it addresses the dual concerns of macroeconomic policy – inflation and growth – with a single policy target. This prevents the policy incoherence and confusion associated with dual mandates. While it is technically true that the Bank of England’s Monetary Policy Committee has a single mandate (inflation) it is clear to most observers that they are also conducting monetary policy with a strong view to supporting the wider economy. An explicit NGDP target would be more transparent and increase the accountability of the central bank. [Continue reading]