Nominal GDP targeting constituency on the rise


Just as the ASI releases a new paper on the benefits of nominal GDP level targeting over inflation targeting, two economists at the Harvard Kennedy School have a new paper on its benefits in developing countries. They join a chorus saying nominal GDP targeting—stabilising the total amount of spending in the economy instead of an index of prices like we currently do with inflation targeting—may outperform the status quo.

Entitled "Nominal GDP Targeting for Developing Countries", helpfully, and written by Pranjul Bhandari and Jeffrey Frankel, it explains how inflation targeting fares poorly when there are large supply-side shocks.

Interest in nominal GDP (NGDP) targeting has come in the context of large advanced economies. Developing countries are better suited for it, however, in light of big supply shocks and terms of trade shocks, such as monsoon rains and oil import price shocks in the case of India. Under annual inflation targeting (IT), the full impact of adverse supply shocks is felt as lost real GDP. NGDP targeting automatically accommodates such shocks, while retaining the advantage of anchoring expectations. We derive the condition under which NGDP targeting would dominate other regimes such as annual IT, to achieve objectives of output and price stability. We estimate key parameters for the case of India and conclude that the condition may indeed hold.

The paper is mainly a restatement of common points in nominal GDP targeting's favour; indeed it leaves out many of the crucial elements of NGDPLT as I see it—using market measures of expectations, targeting the forecast rather than the out-turn, doing policy more automatically than leaving it down to central bankers.

The real point of interest is just how many papers coming out are considering nominal GDP targeting or advocating for it, compared to inflation targeting or other policy rules. It suggests to me, like Prof. Sumner has been saying, that perhaps we are seeing 'the NGDP moment'.