(these estimates are based from the end of Q3 2012 to end 2014).įigure 1 Nominal GDP under different policy scenarios With the 4% path, the MPC would have to keep nominal GDP growth down to around 2.3% p.a. With the 5% path, the MPC would, assuming we aim to hit the target two years ahead, currently have to expand nominal GDP by around 10% p.a. For example we show below what the implicit current gap is between the desired path for nominal GDP and the actual path for nominal GDP if history were deemed to have started in 1997 Q2, and growth paths of, say, 5% and 4% were also deemed to have been appropriate, as an upper and lower example, respectively. By juggling with the start date, and the desired growth path, one could leave the MPC with an immediate requirement that could vary anywhere from a huge expansion to a severe retraction. One of the problems of starting an NGDP target system is that the start date for ‘history’ to commence is itself entirely arbitrary. Of course, the benefits of such a regime change would have to be weighed carefully against the effectiveness of other unconventional monetary policy measures under the proven, flexible inflation-targeting framework.”

The exceptional nature of the situation, and the magnitude of the gaps involved, could make such a policy more credible and easier to understand. However, when policy rates are stuck at the zero lower bound, there could be a more favourable case for NGDP targeting. Under NGDP targeting, bygones are not bygones and the central bank is compelled to make up for past misses on the path of nominal GDP … This is because doing so would add “history dependence” to monetary policy. For example, adopting a nominal GDP (NGDP)-level target could in many respects be more powerful than employing thresholds under flexible inflation targeting. “If yet further stimulus were required, the policy framework itself would likely have to be changed. In this he argued that, if exceptional stimulus needed to be given, the best method could be to adopt a (temporary) target for the level of nominal GDP, whereas most other UK proponents of nominal GDP targetry, such as Sir Samuel Brittan and Lord Skidelsky, have been advocating a target for the growth rate of NGDP. It is in this context that particular attention has been paid by the British press, and, it would seem, the Treasury to a speech given by Mark Carney, the Governor-elect of the Bank of England, in Toronto on December 11, 2012. Hence politicians, and many other commentators, are looking to monetary policy to play an even more aggressive role in getting us out of our present stagnation. Further fiscal expansion is constrained by concerns about the extraordinary (for peace-time) scale of the public sector deficit and rise in the debt/GDP ratio. The economic recovery from the 2008/9 crisis has been depressingly slow in the UK, as in many other developed countries.

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