Larry plumps for nominal GDP targeting: Lawrence Summers: Why the Fed needs a new monetary policy framework: "A monetary framework... should... [have] enough room to respond to a recession... nominal interest rates in the range of 5 percent in normal times...

How that is achieved seems to me to be a question of second-order importance. What is of primary importance is that we establish a framework in which our best guess is that we will have room rather than that we won't have room to respond to the next recession. If we do that and I am wrong in my judgements about the neutral rate of interest or the consequences of extraordinary monetary measures, we will live with marginally... higher inflation. I have never seen a calculation of the costs of running say 3 rather than 2 percent inflation that are terribly large. But if I am right, or if the trend towards a declining neutral real rate continues and we ignore it, we will put ourselves at risk of very substantially exacerbating the next recession with grave consequences.... If I had to choose one framework today, I would choose a nominal GDP target of 5 to 6 percent... for two reasons. First, it would attenuate the issues around explicitly announcing a higher inflation target.... Second, a nominal GDP target has an additional advantage in its implicit response to changing conditions.... A smaller, probably more practical short run step for the Fed would be taking the idea that the current 2 percent inflation target is symmetric seriously...


#shouldread

Comments