Is inflation targeting dead? Central Banking After the Crisis - Vox

Monetary targetry: Might Carney make a difference?Thus, Carney stated,“If yet further stimulus were required, the policy framework itself would likelyhave to be changed. For example, adopting a nominal GDP (NGDP)-level targetcould in many respects be more powerful than employing thresholds under flexibleinflation targeting. This is because doing so would add “history dependence” tomonetary policy. Under NGDP targeting, bygones are not bygones and the centralbank is compelled to make up for past misses on the path of nominal GDP …However, when policy rates are stuck at the zero lower bound, there could be amore favourable case for NGDP targeting. The exceptional nature of the situation,and the magnitude of the gaps involved, could make such a policy more credibleand easier to understand.Of course, the benefits of such a regime change would have to be weighed carefullyagainst the effectiveness of other unconventional monetary policy measures underthe proven, flexible inflation-targeting framework.”One of the problems of starting an NGDP target system is that the start date for ‘history’to commence is itself entirely arbitrary. By juggling with the start date, and the desiredgrowth path, one could leave the MPC with an immediate requirement that could varyanywhere from a huge expansion to a severe retraction. For example we show belowwhat the implicit current gap is between the desired path for nominal GDP and theactual path for nominal GDP if history were deemed to have started in 1997 Q2, andgrowth paths of, say, 5% and 4% were also deemed to have been appropriate, as anupper and lower example, respectively. With the 5% path, the MPC would, assumingwe aim to hit the target two years ahead, currently have to expand nominal GDP byaround 10% p.a. With the 4% path, the MPC would have to keep nominal GDP growthdown to around 2.3% p.a. (these estimates are based from the end of Q3 2012 to end2014).45