MacroMania on Nominal GDP Targeting and the Taylor Rule

David Andolfatto has a interesting technical piece on MacroMania called “Nominal GDP Targeting and the Taylor Rule” in which he derives a relationship between the two, following up on a point by Chris Waller, director of research at the St. Louis Fed.  David starts off with a specific algebraic proposal for NGDP targeting in which the interest rate is on the left-hand side and the difference between NGDP and a target value for NGDP is on the right hand side with a reaction coefficient of 1.   After some algebraic manipulations, he shows that this policy rule is equivalent to a version of the Taylor Rule, though with different reaction coefficients than I originally proposed (here).

While NGDP targeting can certainly be described in the way that David does—with a specific policy instrument and a specific reaction coefficient—it frequently is not specified that way. In fact, sometimes the policy instrument or the reaction coefficient is left unspecified. And in a new research paper, Scott Sumner suggests another way that Fed policy makers might conduct policy in which the monetary base or the interest rate is determined in an iterative manner based on nominal GDP futures without mentioning a reaction coefficient. In all these cases, the comparison with the Taylor Rule is less straightforward. Evan Koenig’s nice All in the Family paper also delves into the relationship between nominal GDP targeting and the Taylor Rule.

In these cases, a good way to compare and evaluate different monetary proposals and rules—and they should be compared and evaluated—is to simulate them in macro models—hopefully dynamic stochastic models.  Because, as Scott Sumner says in his paper, “economists do not agree which models are best,” they should try them out in a host of different models including some of the 50 empirical models in Volker Wieland’s amazing easy-to-use model data base, or with other models if those 50 are not enough. Volker’s aim is to help researchers design better and more robust monetary policy rules.  Of course, there are other evaluation methods including using monetary history and basic monetary theory. But because the dynamics are so important and so hard to work through intuitively, empirical models can help a lot.

In his paper at the recent Jackson Hole conference, Bob Hall criticized nominal GDP targeting, citing his 1994 paper with Greg Mankiw. Bob argues that “A policy of stabilizing nominal GDP growth would require contractionary policies to lower inflation when productivity growth is unusually high. Such a policy might easily trigger a spell at the zero lower bound.” No one at the conference objected to this statement, and I do not recall nominal GDP targeting being mentioned at the conference, though policy rules were mentioned quite a bit. This suggests that more policy evaluation research on the new and different proposals is needed to inform the policy discussion, and it is certainly welcome in my view.

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