Nominal GDP Targeting

In the wake of the financial panic and economic recession of 2008, numerous macroeconomic policies are being re-evaluated. Some economists argue that the crisis demonstrates a need to move away from Ben Bernanke-type discretionary monetary policy and instead adopt some monetary policy rule. One such proposed rule is nominal GDP (NGDP) targeting, made popular by a set of economists that have been given the moniker “market monetarists.”

Market monetarism is largely a blogosphere phenomenon, with the most prominent blogs amongst the group being Scott Sumner’s The Money Illusion, Lars Christensen’s The Market Monetarist, and David Beckworth’s Macro and other Market Musings. The most well-known of the group, Scott Sumner (2012; 2011), has authored two scholarly works that outline his vision for monetary policy, and Christensen (2011) has authored a working paper summarizing the work of the group.

But market monetarism and NGDP targeting have started to break through into the mainstream media, think tank, and policy worlds as well. Economist Tyler Cowen dubbed the day that the Federal Reserve announced QE3 as “ Scott Sumner Day,” partially crediting the influence of Sumner’s blogging for the Fed’s expansionary move. CNBC pundit Larry Kudlow has warmed to NGDP targeting, and thereby changed his previously critical tune on Bernanke. James Pethokoukis, a columnist for the hugely influential American Enterprise Institute, has been using market monetarism to try to convince the GOP to learn to stop worrying and love the helicopter.

Unfortunately, despite market monetarism’s recent popularity, nominal GDP targeting fails to achieve the end of aiding macroeconomic coordination. Market monetarist theory and policy is unsatisfactory primarily because Market monetarists use a faulty theoretical framework in analyzing economic activity, they misunderstand how expectations enter into economic decision making, and they do not recognize the actual consequences of the monetary policy necessary to stabilize NGDP expectations.

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