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

Is inflation targeting dead? Central Banking After the CrisisFigure 1 Nominal GDP under different policy scenarios230210190170Actual GDP5% NGDP target4% NGDP target4.5% NGDP target1501301102Q 1997 =10090Q2/97 Q4/98 Q2/00 Q4/01 Q2/03 Q4/04 Q2/06 Q4/07 Q2/09 Q4/10 Q2/12Source: ONS, Morgan Stanley Research.Perhaps for this purpose, history will be deemed to start in July 2013 when under newmanagement? Even if bygones remain bygones until that point, a nominal GDP leveltarget could be much more demanding than a nominal GDP growth target.Assume that a 5% GDP level target was set now, but that the current OBR nominal GDPgrowth forecast was actually achieved over the next two years. Then the shortfall fromtarget would by then be of the order of almost 4%. With a nominal GDP level target,that shortfall has to be clawed back. Assuming that this is to be done over the next twoyearhorizon, then that implies a nominal GDP growth target of about 7% for each ofthose two years.Effectively, any overestimation of the sustainable real rate of growth, and suchoverestimation is all too likely, could force an MPC, subject to a level nominal GDPtarget, to soon have to aim for a significantly higher rate of inflation. Is that really whatis now wanted? Bring back the stagflation of the 1970s; all is forgiven?Whether an NGDP target is to be assessed in levels or in growth format, there are twoother reasons to be chary of it. First, its use would be operationally problematical.A nominal GDP target has several operational shortcomings in comparison with aninflation target. The data for CPI are available within three weeks of the end of eachmonth. Nominal GDP data are only available quarterly, with a lag of two months from46