The Case for Nominal GDP Targeting

The recent economic crisis has exposed important flaws with inflation targeting, particularly the form practiced by real world central banks. A nominal GDP target can address the dual concerns of macroeconomic policy – inflation and jobs – with a single policy target. Had central banks pursued nominal GDP targeting during 2008, it is quite likely that both the financial crisis and the recession would have been much milder. Nominal GDP targeting works best when “level targeting” is used, which means making up for past underor overshoots, and also if the central bank targets market expectations of nominal GDP growth.

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