It’s a safe bet that the hottest topic in monetary policy is going to be raised when the Federal Reserve chairman, Ben S. Bernanke, takes questions from reporters Wednesday afternoon.
That would be nominal G.D.P. targeting, a concept lately endorsed elsewhere on this very Web site by the liberal economists Christina Romer and Paul Krugman (separately, and with very different degrees of enthusiasm) and long embraced by a diverse group of other economic thinkers.
It’s actually a pretty simple idea. The Fed has developed a policy of seeking to maintain inflation — the growth of prices and wages — at an annual rate of roughly 2 percent as the best way to meet its legal objectives of maintaining stable prices and maximizing employment. Proponents of G.D.P. targeting argue that the central bank instead should seek to maintain a steady rate of increase in the dollar value of the nation’s economic output, the nominal gross domestic product, an alternative measure that combines the rate of inflation and the rate of economic growth.
The Fed’s current policy, they argue, has failed to stimulate growth sufficiently, leaving more than 25 million Americans unable to find full-time work. A G.D.P. target, by contrast, would require the Fed to take more aggressive steps, like another round of asset purchases.
“It would work like this,” wrote Ms. Romer, a professor at the University of California, Berkeley, who was chairwoman of President Obama’s Council of Economic Advisers. “The Fed would start from some normal year — like 2007 — and say that nominal G.D.P. should have grown at 4 1/2 percent annually since then, and should keep growing at that pace. Because of the recession and the unusually low inflation in 2009 and 2010, nominal G.D.P. today is about 10 percent below that path. Adopting nominal G.D.P. targeting commits the Fed to eliminating this gap.”
As I wrote in Monday’s paper, this idea has garnered little apparent support inside the Fed.
One fundamental reason is that Mr. Bernanke and other Fed officials believe that the current system is working pretty well. Not well enough to heal the economy, of course, but in their view that is beyond the Fed’s power.
“My guess is that the current framework for monetary policy — with innovations, no doubt, to further improve the ability of central banks to communicate with the public — will remain the standard approach, as its benefits in terms of macroeconomic stabilization have been demonstrated,” Mr. Bernanke told a Boston audience in October.
The focus of that policy, which Mr. Bernanke described as “flexible inflation targeting,” is the Fed’s commitment to maintain inflation at about 2 percent a year. The Fed views the public belief that it will do so as perhaps its most valuable asset because it creates a stable environment for sustainable economic growth.
A switch to G.D.P. targeting would amount to a declaration of comfort with higher levels of inflation.
Many proponents regard this as the basic point of the proposal, arguing that the Fed has become overly fixated on the rate of inflation when it should be focused on the health of the economy, and that allowing — indeed, encouraging — a higher rate of inflation in the short term would help to stimulate growth.
Calling for a G.D.P. target rather than simply proposing an increase in the Fed’s inflation target, as some other economists have done, amounts in this sense to a marketing device, a piece of packaging.
“As far as I can see, the underlying economics is about expected inflation,” Mr. Krugman wrote in a mid-October blog post, “but stating the goal in terms of nominal G.D.P. may nonetheless be a good idea, largely as a selling point, since it (a) is easier to make the case that we’ve fallen far below where we should be and (b) doesn’t sound so scary and antisocial.”
So far, that sales pitch has failed to budge the Fed.
Article source: http://feeds.nytimes.com/click.phdo?i=8ec4af220fbbed6ca1373492c4377e80
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