Economics, Monetary Policy, Pethokoukis

Mishkin and Woodford to Fed on NGDP level targeting: Faster, please


It was big news when the Federal Reserve recently announced the specific economic criteria that would guide its interest rate policy. Historic even.

But not historic enough for economists Frederic Mishkin and Michael Woodford. In a WSJ op-ed today, they first praise the FOMC for deciding to keep interest rates near zero as long as the unemployment rate remains above 6.5%, and the inflation rate is projected to be no higher than 2.5%. Mishkin and Woodford

The Fed’s increased clarity about its intentions is highly desirable. This is especially so now, when the current funds-rate target cannot be further lowered, yet aggregate demand remains insufficient. A commitment not to raise rates in the future as soon as might have been expected is an obvious way the FOMC can loosen current financial conditions. Yet the new approach has downsides that the Fed needs to address.

But Mishkin and Woodford worry that those criteria, while a step in the right direction, leave too much perceived wiggle room on inflation. Plus the unemployment rate is an imprecise bit of data. M&W:

It would have been better if the FOMC had explained its temporary policy by describing the size of the nominal growth shortfall that needed to be made up. A stated intention to “catch up” to a particular nominal GDP path would have clarified that how long interest rates will remain low will depend on economic outcomes, while emphasizing the central bank’s intention to return to a path consistent with its long-run inflation target.

Woodford was already a member of the NGDPLT (nominal gross domestic product level targeting) community and is now joined by Mishkin, a former Fed governor. Here’s a bit more from Woodford in a new Bloomberg interview:

I think the Fed should be more explicit about how exactly it expects to choose among possible short-run paths, lest the inflation target itself cease to be meaningful; and I think that a commitment to a nominal GDP target path — one that is chosen so as to yield the desired inflation rate in the medium to long run, while also explaining how to balance the inflation outlook with the outlook for real GDP growth in the short run — would be a good way to do that. … A nominal GDP target would explain why they’re doing what they’re doing now, and also how they would shift to a less accommodative regime in the future, once the “catch up” to the target path has occurred. … I think that a move to a nominal GDP target could actually provide much-needed clarity. It’s not too late for it to have a positive effect.

M&W, shorter: Faster, please.


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