Friday, 8 March 2013

NGDP Targeting and the Inflation Messaging Problem

Quite apart from the substantial economic benefits of NGDP level targeting, it has a messaging advantage. Targeting nominal incomes is quite a lot easier to explain to the public than targeting inflation. For example, imagine the following hypothetical news story:
CPI inflation fell to 1.8% last month according to latest statistics, providing consumers with a welcome dose of relief in the horrible economy. 
 There is hope that the ending of the squeeze on real incomes will boost consumers’ spending power and help get the recovery back underway. 
[Central bank economist] said the news was cause for celebration. “We knew our flexible inflation target was a good idea and this has been proved now that inflation is coming back under control.” 
[Pensioner lobby spokesman] was cautiously optimistic. “This is an optimistic ray of light for pensioners, many of whom are poor and who you should all feel sorry for. Now if only the bank would unwind its distortionary QE policies then prices would be lower for working people and there would be rainbows and unicorns for everyone.”
Under NGDP targeting, we instead get this:
Nominal income growth declined to 2% last quarter according to latest statistics, suggesting dismal prospects for the recovery. 
The continued fall in nominal incomes is likely to dim the prospects for the recovery. This suggests that the Bank of England should be considering more monetary easing, considering that nominal income is getting further and further away from where it ‘should be’ under the Bank’s level target. 
[Central bank economist] said that the Bank would not act. “Yes, nominal income growth is abysmal. But we think there are costs and risks to further action. I won’t explain what these costs and risks are, but suffice to say that we won’t be helping anyone.” 
[Pensioner lobby spokesman] saw no cause for alarm. “Yes, growth is weak. But forget working people – the real problem is rich pensioners who hold government bonds! The Bank should reduce nominal growth even further to help these people out.”


  1. Ah but you are forgetting, QE raises yields. As in Japan and the US. German Bunds are not lower yielding than US treasuries because they are "safer". :)

    So even pensioners would be benefiting from QE. In fact insufficient QE is the worst of all worlds for policy explanations. If there had been no QE no one could blame central banks for "holding down yields across the curve". If sufficient QE had been done yields would have risen fairly dramatically back into normal ranges, and again no one could blame QE for holding down rates. Only in this no mans land can such an argument have play.

    1. To some extent, I agree. On the other hand, I think it is at least conceivable that some small subset of the population loses out from higher inflation - I can't imagine why pension lobbies would be such strident critics of the policy otherwise (unless of course they're totally clueless, which I wouldn't rule out).

      And anyway they always do have someone chiming in in one of these articles, whether they're right or not.