Below is one of the better links i've seen that explains this policy.

LINK

Basically, the argument is that the Fed should change the mandate to one of nominal GDP targeting instead of price stability and full employment. By changing to NGDP targeting, the Fed can react more proactively in times of deep recession to whatever extent is necessary. This forced inflation in recessionary times would force consumers and businesses to spend/invest to avoid negative real interest rates.

My issues with this policy are that it sounds good in a laboratory environment, but I think the ability of the Fed to create inflation in recessionary times would be highly questionable, even with "unlimited" policy tools. Also, it seems like we've gotten into a lot of trouble in the past from the Fed trying to manipulate the business cycle (i.e. artificially low rates in the 2000's), and this would increase this manipulation to a much higher level. Basically there wouldn't be a business cycle anymore, if this policy worked to perfection. Also, what if the pre-2007 level trend is an unsustainable level of growth generated from asset bubbles? Wouldn't we just be building up a bigger asset bubble from forced inflation? Wouldn't all of the world's central banks have to be committed to this same policy? Anyways, I'm curious to hear the MT's thoughts on this....

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Posted by kfizzle85

Member since Dec 2005

22022 posts

Posted on 10/25/11 at 9:02 am to GeneralLee

Sounds like some poli bs because you could just take your argument, replace it with "basically the idea is a dual mandate," and it would pretty much be the same thing. Different title, same substance.

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Posted by LSURussian

Member since Feb 2005

135051 posts

Posted on 10/25/11 at 9:54 am to GeneralLee

quote:
the Fed should change the mandate to one of nominal GDP targeting instead of price stability and full employment.

Since the Fed only occasionally attains its current dual mandates, what's the point of giving it another replacement mandate that it will only occasionally attain?

The Fed can nudge the economy along, but it CAN'T manage it.

With implementation of your new suggested mandate, every time the GDP goal is missed (which it would be), the "End the Fed" loonies will come out of the woodwork and howl at the moon screaming, "SEE! THE FED DOESN'T KNOW WHAT IT'S DOING! LET'S KILL THE FED!"

eta: inserted an omitted word.

This post was edited on 10/25/11 at 9:58 am

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Posted by 90proofprofessional

Member since Mar 2004

24445 posts

Posted on 10/25/11 at 12:46 pm to LSURussian

I thought the point of it, at least as argued by some, was to change it to only one mandate of the two at a time, based on the prevailing macro-conditions. Like GDP targeting only, if unemployment is over 7%. If we're going for countercyclical policy, I think it's a much more credible approach than expecting Congress to stop deficit spending when in an expansion.

But yeah, the tradeoff is more power to the central bank, which is less politically tied (which is why it's more credible for doing things that'd be unpopular).

Yep, the End-the-Fed types would howl.

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