The Case for Nominal GDP Level Targeting
Abstract
In this paper, I make the case for a nominal GDP level target in the U.S. I begin by arguing that the Federal Reserve’s current flexible average inflation targeting regime is deficient. I then argue that since a competitive monetary equilibrium is optimal, monetary policy should seek to replicate the competitive monetary model. Doing so resembles nominal GDP targeting. Finally, I offer the following practical reasons why policymakers might prefer a nominal GDP target. Nominal GDP targeting (a) does not require policymakers to determine whether current economic fluctuations are demand-driven or supply-driven nor does it require real-time estimates of the output gap, (b) automatically prevents the central bank from exacerbating supply shocks, and (c) leads to greater financial stability.