Economics
Nominal GDP Targeting
Nominal GDP targeting is an economic policy strategy where a central bank sets a specific target for the nominal GDP growth rate. This approach aims to stabilize the economy by adjusting monetary policy to achieve the desired GDP growth rate. By focusing on nominal GDP, which includes both real output and price level changes, policymakers can address both inflation and economic growth.
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11 Key excerpts on "Nominal GDP Targeting"
eBook - PDF- N. Gregory Mankiw(Author)
- 2007(Publication Date)
- University of Chicago Press(Publisher)
In reality, these assumptions could not be completely satisfied, nor in practice could one expect to achieve the performance bound. Nonetheless, the computation of such a bound is a useful step: were the perfor- mance bound to indicate little room for improvement beyond historical Fed policy, there would be little reason to switch to a Nominal GDP Targeting regime. To determine the optimal GDP targeting policy, we adopt the objective of minimizing the variance of GDP growth. It should be emphasized that this differs from the performance criterion used by McCallum (1988), who exam- ined the deviation of the level of nominal GDP from a constant growth path of 3 percent per year. The key difference is that, by attempting to stabilize the growth rate rather than the level around a constant growth path, we are permit- ting base drift in the target. As discussed in section 1.1, not permitting base drift has the feature-which to us seems undesirable-of leading to a policy 39 The Use of Monetary Aggregate to Target Nominal GDP of inflating when nominal GDP is below its target path but is growing stably at 3 percent per year, and of tightening when GDP growth is stable at 3 percent but GDP is above its target path. Because of lags in data availability, the Fed is unable to measure all shocks to the economy as they occur.
eBook - ePubAccelerated Land Reform, Mining, Growth, Unemployment and Inequality in South Africa
A Case for Bold Supply Side Policy Interventions
- Nombulelo Gumata, Eliphas Ndou(Authors)
- 2020(Publication Date)
- Palgrave Macmillan(Publisher)
https://www.stlouisfed.org/publications/regional-economist/second-quarter-2019/bullard-nominal-gdp-targeting?Creamer, K., and Botha, T.R. 2017. Assessing Nominal GDP Targeting in the South African Context. Central Bank Review , 17(1), March 2017, 1–10. https://www.sciencedirect.com/science/article/pii/S1303070116300506?via%3Dihub .Du Plessis, S., and Rietveld, M. 2013. Should Inflation Targeting be Abandoned in Favour of Nominal Income Targeting? University of Stellenbosch Economic Working Papers: 12/13.Frankel, J. 1995. The Stabilizing Properties of a Nominal GNP Rule. Journal of Money, Credit and Banking , 27(2), 318–34.Frankel, J. 2012. Central Banks Can Phase in Nominal GDP Targets without Damaging the Inflation Anchor. VoxEU , December 19.Frankel, J. 2013. Nominal GDP Targets without Losing the Inflation Anchor. In L. Reichlin and R. Baldwin (eds.), Is Inflation Targeting Dead: Central Banking after the Crisis . Centre for Economic Policy Research: London, pp. 90–94.Frankel, J. The Case for (and Drawbacks of) Nominal GDP Targets. Capital Formation and Growth . Harvard Kennedy School, Harvard University. https://www.brookings.edu/wp-content/uploads/2017/12/frankel-slides.pdf .Hassan, S, and Loewald, C. 2013. Nominal GDP Targeting and the Monetary Policy Framework . South African Reserve Bank Working Paper WP 1305.- Hatzius, J. 2011. The Case for a Nominal GDP Level Target. US Economics Analyst, Goldman Sachs Global ECS Research, October.
Hoelle, M., and Peiris, U. 2013. On the Efficiency of Nominal GDP Targeting in a Large Open Economy . Krannert Working Paper Series, Paper No. 1273.Summers, H., Wessel, D., and Murray, J.D. 2018. Rethinking the Fed’s 2 per cent Inflation Target: A Report from the Hutchins Center on Fiscal and Monetary Policy at Brookings. https://www.brookings.edu/wp-content/uploads/2018/06/ES_20180607_Hutchins-FedInflationTarget.pdf
eBook - ePub- Jacob Frenkel, and Morris Goldstein(Authors)
- 1996(Publication Date)
- INTERNATIONAL MONETARY FUND(Publisher)
III. Alternative Policy Rules
The policy rules that we consider in this paper fall into three groups. The first group is characterized by uncoordinated monetary policies and freely flexible exchange rates. The rules that are compared are money targeting and nominal GNP targeting. The second group encompasses two rules that use monetary policy to limit the flexibility of exchange rates. The first rule is a Bretton-Woods-like regime of nominal exchange rate parities; the second rule is a target zone plan that targets a real effective exchange rate. Whereas the first two groups of rules have assumed that fiscal policy is exogenous, the third group contains rules that use both monetary and fiscal policy to hit domestic and external variables.Uncoordinated Rules: Money Versus Nominal Income Targeting
During the 1970s, many central banks moved from a more discretionary monetary policy to explicit targets for monetary aggregates. Money targeting was seen as a way of avoiding destabilizing fine-tuning, and of counteracting the alleged bias of central banks to aim for more-than-full employment. In a well-known article, Poole (1970) showed that in the face of shocks to the investment-saving (IS) curve, stabilizing the nominal money supply stabilizes output. In contrast, if shocks are primarily to money demand, the appropriate policy is to accommodate them and to stabilize interest rates.The widespread evidence that money demand had shifted in the early 1980s as a result of financial innovations and of deregulation led to disenchantment with monetary targeting. Concern for the inflationary consequences of pegging interest rates led to a search for another nominal indicator that could serve as an intermediate target. Tobin (1980) argued that nominal GNP had several advantages over monetary aggregates: it was less sensitive to the shocks facing money demand, and it was not affected by the positive relationship between velocity and the nominal interest rate. The latter feature of money demand could lead to a fall , rather than a rise, in real interest rates in the face of an inflationary shock. The disadvantage of nominal GNP targeting, however, is that hitting a preset nominal GNP path exactly implies a linear, one-for-one trade-off between changes in the price level and output (Fischer (1988
eBook - ePubInflation Targeting and Central Banks
Institutional Set-ups and Monetary Policy Effectiveness
- Joanna Niedźwiedzińska(Author)
- 2021(Publication Date)
- Routledge(Publisher)
At the same time, recognising the fact that inflation targeting was introduced as a framework to fight too high inflation, some economists have raised doubts about whether it can be equally suitable for fighting too low price growth, which would suggest the need to go beyond IT (Heise, 2019, p. 77). Thus, a number of alternative targeting rules have been proposed. Similarly to the case of raising inflation targets, their main motivation is to deal with the problem of the ZLB.Apart from the already mentioned price-level targeting and Nominal GDP Targeting, among the discussed options are temporary price-level targeting (Bernanke, 2019, pp. 3–48), i.e. inflation targeting combined with price-level targeting but only at the ZLB, or average inflation targeting79 (Mertens and Williams, 2019), i.e. where any undershooting of the inflation target would have to be compensated with subsequent overshooting (an overshooting of the target would call for the opposite reaction).80 Analysing each of them is beyond the scope of this study, but even the supporters of the proposed alternative targeting rules admit that they are not without drawbacks (Blanchard et al., 2014a, pp. 8–9).81 For example, price-level targeting implies that if inflation is too high, the central bank must tighten monetary policy, even risking a recession to return to the previously announced price-level path, which, in practice, would be highly problematic. In turn, Nominal GDP Targeting requires that potential output is well specified, otherwise constant revisions of the targeted nominal GDP path would be necessary. Also, other targeting rules may, in fact, result in increasing—instead of decreasing—the instability of the economy. Thus, the implications need to be carefully considered, which will probably take some time. With the US Fed announcing average inflation targeting in August 2020, the trial period has started and will be carefully analysed by other central banks.Importantly, even if some of the alternative targeting rules are adopted in the future, many of the investigated institutional features of inflation targeting will most likely remain in place. Particularly in the case of the currently discussed more complex rules, aspects related to the accountability and transparency of central banks’ frameworks can become even more critical.
- International Monetary Fund(Author)
- 1988(Publication Date)
- INTERNATIONAL MONETARY FUND(Publisher)
Meade (1984) that the whole “panoply” (p. 4) of demand-management policies for the control of money expenditure should be used to keep total money expenditures on the products of labor (i.e., money GDP or money national income) on a steady and moderate growth path. In an open economy, according to Meade, monetary policy has a comparative advantage on the level of the exchange rate, so that most of the burden of keeping money GDP on a stable, moderate growth path would have to fall on fiscal policy. The level of real wages and changes in wage differentials should instead be used to guarantee full employment. He calls this policy strategy “New Keynesianism” (p. 4), as opposed to “Orthodox Keynesianism” (p. 3), which is aimed at manipulating money expenditure to control the level of employment. Orthodox Keynesianism, according to Meade, led to excessive inflation, owing to the lack or unfeasibility of an appropriate incomes policy and the existence of labor market rigidities.Meade’s proposal has some appeal for the EMS because it would allow for the endogeneity of the money supply necessary for a smooth working of the balance of payments adjustment process within the system. It would thus be consistent with the rule described in the previous section. Money GDP targets could be set for each country individually, but in a coordinated fashion consistent with a declining inflation rate in the higher-inflation countries and a low and stable inflation rate in the low-inflation countries. Fiscal policy would be the primary instrument to stabilize nominal GDP, and monetary policy could follow the rule outlined in the previous section, or at least follow the rule of non sterilization of international reserve flows.Nominal GDP Targeting could also be used as a noncontingent rule—that is, as a velocity-adjusted money growth target. This would be particularly appropriate if asymmetric velocity changes are expected (because of financial innovation, liberalization of capital movements, etc.). Money growth could then follow the path implied by the announced target for nominal GDP without necessarily implying a feedback to fiscal policy, which would depend on whether the authorities concerned were prepared to fine-tune or not.
eBook - PDF- Rhona C. Free(Author)
- 2010(Publication Date)
- SAGE Publications, Inc(Publisher)
3 7 MONETARY POLICY AND INFLATION TARGETING PAVEL S. KAPINOS Carleton College DAVID WICZER University of Minnesota I nflation targeting (IT) is a framework for the conduct of monetary policy, under which the monetary authority announces a medium- or long-run inflation target and then uses all available information to set its policy instrument, the short-term nominal interest rate, so that this target is met. Short-lived deviations from the inflationary target may be acceptable, especially when there may be a short-run trade-off between meeting the target and another welfare consideration, for example, the output gap—the difference between actual and potential output. Hence, although the central bank commits to meeting a certain inflationary target, in practice, IT takes a less rigid form, with the central bank exercising some discretion over the path of actual inflation toward its tar-get. Recently, dozens of central banks around the world have introduced IT as their operational paradigm. Numerous studies indicate that this policy has been suc-cessful in achieving macroeconomic stability at no long-run cost in terms of lower real activity. Many central banks that have not explicitly subscribed to IT have been shown to follow it implicitly. IT provides a way for the central bank to communicate its intentions to the public in a clear, unequivocal manner, making the conduct of monetary policy more transparent and predictable. Transparency allows the public to hold the central bank accountable for its policy actions. In fact, in some countries, inflation-targeting central banks are subject to intense public scrutiny from the legislative bodies. Predictability of monetary policy allows the cen-tral bank to manage public inflationary expectations and better anchor them around the inflationary target; this allows the central bank to achieve macroeconomic stabil-ity more effectively.
eBook - ePub- Jack Rabin(Author)
- 2020(Publication Date)
- Routledge(Publisher)
Conducting Monetary Policy with Inflation TargetsGeorge A. KahnVice President and Economist, Federal Reserve Bank of Kansas City, Kansas City, MissouriKlara ParrishAssistant Economist, Federal Reserve Bank of Kansas City, Kansas City, MissouriReprinted from: Federal Reserve Bank of Kansas City Economic Review, v. 83, n. 3 (Third Quarter 1998) 5–32.Since the early 1990s, a number of central banks have adopted numerical inflation targets as a guide for monetary policy. The targets are intended to help central banks achieve and maintain price stability by specifying an explicit goal for monetary policy based on a given time path for a particular measure of inflation. In some cases the targets are expressed as a range for inflation over time, while in other cases they are expressed as a path for the inflation rate itself. The measure of inflation that is targeted varies but is typically a broad measure of prices, such as a consumer or retail price index.At a conceptual level, adopting inflation targets may necessitate fundamental changes in the way monetary policy responds to economic conditions. For example, inflation targeting requires a highly forward looking monetary policy. Given lags in the effects of monetary policy on inflation, central banks seeking to achieve a target for inflation need to forecast inflation and adjust policy in response to projected deviations of inflation from target. But central banks without an explicit inflation target may also be forward looking and equally focused on a long-run goal of price stability. Thus, at a practical level, adopting inflation targets may only formalize a strategy for policy that was already more or less in place. If so, targets might improve the transparency, accountability, and credibility of monetary policy but have little or no impact on the way policy instruments are adjusted to incoming information about the economy.
eBook - PDFThe Monetary Transmission Process
Recent Developments and Lessons for Europe
- D. Bundesbank(Author)
- 2001(Publication Date)
- Palgrave Macmillan(Publisher)
9 The Chancellor's remit to Bank of the England (HM Treasury, 1997) mentions `undesired volatility of output'. 10 The Minutes from Bank of England's Monetary Policy Committee (Bank of England, 1999) are also explicit about stabilising the output gap. 11 Several contributions and discussions by central bankers and academics in Lowe (1997) express similar views. Ball (1999) and Svensson (1998b) give examples of a gradualist approach of the Reserve Bank of New Zealand. Indeed, a quote from the ECB (European Central Bank, 1999 p. 47) also gives some support for an interpretation with > 0, as well as some weight on minimizing interest rate variability: a medium-term orientation of monetary policy is important in order to permit a gradualist and measured response [to some threats to price stability]. Such a central bank response will not introduce unnecessary and possibly self-sustaining uncertainty into short-term interest rates or the real economy Thus, it is seems non-controversial that real world in¯ation targeting is actually ¯exible in¯ation targeting, corresponding to > 0 in (2.7). The loss function (2.7) highlights an asymmetry between in¯ation and output under in¯ation targeting. There is both a level goal and a stability goal for in¯ation, and the level goal ± that is, the in¯ation target ± is subject to choice. For output, there is only a stability goal and no level goal. Or, to put it differently, the level goal is not subject to choice; it is given by potential output. Therefore, I believe it is appropriate to label minimising (2.7) as `(¯exible) in¯ation targeting' rather than `in¯ation-and-output-gap targeting', especially since the label is already used for the monetary policy regimes in New Zealand, Canada, United Kingdom, Sweden and Australia. What index and which level? Which price index would be most appropriate? Stabilising the CPI should simplify consumers' economic calculations and decisions.
eBook - PDF- Ben S. Bernanke, Michael Woodford, Ben S. Bernanke, Michael Woodford(Authors)
- 2007(Publication Date)
- University of Chicago Press(Publisher)
Specifically, for stabilization policy, the above principle entails trying to limit variability in the inflation-relevant output gap, x t u t , rather than variation in x t alone. From such a perspective, monetary policy is a natural instrument for eliminating the real distortions (i.e., deviations of y t from y t ∗ ) that arise Optimal Inflation-Targeting Rules 169 from nominal stickiness, and for pursuing a mean inflation rate that is con-sistent with insulating the economy from the most serious e ff ects of viola-tions of superneutrality (e.g., downward pressure on potential output arising from the interaction of high inflation and nonindexed tax scales). But the achievement of minimum price inflation and gap variability is con-ditional on the real shocks and on the steady-state magnitudes that deter-mine the flexible-price values of output and other real variables. Such an arrangement amounts to a prescription for a “neutral” monetary policy, in the terminology of Goodfriend and King (1997). Movement of output closer to its social optimum is then the task of other policy instruments, which achieve this aim through policies designed to reduce the variance of u t to zero. If this view about instrument delegation is accepted, the trade-o ff problem of monetary policy is eased. There is no conflict between minimizing variability in inflation and in the inflation-relevant output gap, and so the sharp fluctuations in the inflation target exhibited in Giannoni and Woodford’s section 3.3.3 are no longer called for. Conclusions As I noted at the outset, Giannoni and Woodford have produced an im-portant, wide-ranging, and innovative paper. Its findings on the optimal in-flation target for the United States will be a benchmark for future work, and applications to inflation-targeting countries can provide a welfare evaluation of the constant inflation targets typically followed in practice.
- Derek H. Aldcroft, Ross E. Catterall(Authors)
- 2017(Publication Date)
- Taylor & Francis(Publisher)
It was argued by the monetarists that there was a stable relationship between one or more monetary aggregates and the general level of prices. Monetary policy was directed at a particular rate of growth in the monetary aggregate (the intermediate target) compatible with low inflation. There was a gradual move towards monetary targets in many of the industrialised countries and, by the end of the 1970s, six of the G7 members had adopted targets. However, by the end of the 1980s, there had been a rapid downgrading of rigid monetary rules so that, by the early 1990s, monetary targets had been dropped by many countries in favour of exchange rate targets and inflation targets.Exchange rate targets
The prospect of widespread floating rates led a core group of European countries to form a European Common Margins Agreement (the ‘snake’) which was designed to narrow the margin of fluctuation of EC member currencies below those set by the 1971 Smithsonian agreement. The Exchange Rate Mechanism (ERM) of the European Monetary System (EMS) was formed in 1979 and developed into a Deutschmark (DM) block during the 1980s where the DM was the key currency and member countries were required to follow the monetary policy of the Bundesbank. The intermediate target for members was to maintain an announced exchange rate against the DM, while the final objective was low inflation.Inflation targets
Whereas monetary targets and exchange rate targets are weapons of control, an inflation target is a target and nothing else. Inflation targets have been a recent innovation, introduced when other techniques of monetary control have failed, for instance in the UK, Finland and Sweden in the wake of leaving the ERM, or in Canada following the failure of monetary targeting.It must be noted that, while each of these regimes uses an explicit nominal anchor to achieve price stability, some countries have eschewed such a nominal anchor and instead rely on an implicit nominal anchor. The USA is perhaps the best example, where the Federal Reserve has adopted a strategy which involves forward-looking behaviour to monitor carefully signs of future inflation and conducts periodic pre-emptive strikes by raising interest rates if there appears to be a threat of inflation. While the pre-emptive strategy is a feature of inflation-targeting regimes, the USA does not have an official nominal anchor and its monetary policy regime is not as transparent as that of other countries which are under a regime of inflation targets. During the 1990s, the Federal Reserve was criticised for creating unnecessary volatility in financial markets because of this approach to policymaking and, arguably, the Federal Reserve is more prone to time-inconsistency problems than many other central banks.
eBook - ePub- International Monetary Fund(Author)
- 1986(Publication Date)
- INTERNATIONAL MONETARY FUND(Publisher)
III Velocity of Money and the Practice of Monetary Targeting: Experience, Theory, and the Policy Debate
Peter Isard and Liliana Rojas-SuarezOver much of the past decade, monetary policies in most of the major industrial countries have been oriented toward controlling the growth rates of monetary aggregates as a medium-term strategy for bringing down inflation. Although inflation rates rose considerably during the late 1970s, substantial declines since 1980 stand as evidence of an increased commitment to price stability. Indeed, by 1985, the average rate of consumer price inflation in the seven major industrial countries had been reduced to one third of the peak rate in 1980, and to half of the average rate for the decade through 1977.In their attempts to achieve greater price stability, however, central banks have exercised considerable discretion to deviate from or adjust their monetary targets, instead of following the “monetarist prescription” of precommitting themselves and adhering rigidly to money supply rules.1 Most central banks have exercised discretion to adjust, de-emphasize, or abandon their targets in response to financial innovations and deregulation, which have introduced new instruments to serve as money or money substitutes, with significant unanticipated effects on the relationships between the targeted monetary aggregates and variables such as nominal gross national product (GNP). Discretion has also sometimes been exercised during periods in which unanticipated exchange rate developments have created concerns about the external influences on output and inflation.This paper examines the behavior of velocity and the practice of monetary targeting in seven major industrial countries—Canada, the Federal Republic of Germany, France, Italy, Japan, the United Kingdom, and the United States. Its purpose is to provide a background for reassessing the practice of monetary targeting, in light of both the experiences of the past decade and the theoretical foundations that have been developed for understanding the behavior of velocity and the different channels through which monetary policy may influence output and other real variables. Those experiences and theoretical foundations have led to different views on the appropriate conduct of monetary policy. Without supporting any particular position, this paper concentrates on clarifying the empirical perspectives and theoretical assumptions that lead to the different conclusions.
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