The idea of having the Federal Reserve target nominal GDP has gotten a lot of play lately. So I thought I would ask Glenn Hubbard, a top economic adviser to Mitt Romney, his thoughts on the matter. He’s someone, after all, that I could see as the next Fed chairman if Romney gets elected. I included some of his answer yesterday in a Q&A, but here is Hubbard (speaking for himself and not the campaign) at more length on NGDP:
It’s certainly something that economists have talked about for years. … Economists routinely look it. Having said that, I’m not sure the Fed would be driven to do much more than it’s doing right now. It already has an amazingly accommodative monetary policy and it’s hard to see how they could make it ever more accommodative. … The Fed is almost pushing on a string right now because the usual housing channel for refinancing is blocked. And on the business side, people are sitting on mountains of cash, but it’s not whether the 10-year yield is 1.9 percent or 2.3 percent that’s going to ignite U.S. investment. … What makes me nervous is anything that looks like temporary increases in inflation because our experience is that’s a genie that’s very hard to put back in the bottle. I would much rather see us do the restructuring in the economy that we need for conventional monetary policy to work, which would mean clearing up the policy uncertainty that is limiting the willingness of business to invest, and help facilitate the deleveraging on the household side. Part of the problem is that the Fed is trying to do the job of the government, too, because the government’s has been sitting on its hands.
Are you concerned such a policy wouldn’t work or maybe it works but then we face higher inflation expectations for a long time and it is self defeating long term?
Actually, it’s a bit of both. In the near term, it’s hard for me to imagine that it would work much differently than what the Fed is currently doing, which isn’t exactly a booming success. And then in the longer term, I would worry about inflationary expectations becoming unhinged. And I think that’s something the Fed would find very difficult to reverse.