The NGDP Targeting concept for the ‘masses’

Lorenzo has written a very good introduction to NGDP Targeting: “Money, prices, assets and evasions of responsibility.”  In his e-mail he writes: “I have a go at justifying NGDP targeting to a lay audience”, and does a good job at it.

His punch-line: “If central banks determine aggregate demand, the only way to hold them genuinely responsible for what they actually do is for them to explicitly and directly target it: also known as NGDP targeting.”

Coincidentally, in the last couple of days I argued that while most central banks were acting alike, the RBA was an exception.

In his post Lorenzo writes:

The difference between the RBA and the BoJ, the Fed or ECB is that while all four central banks have inflation targets, the RBA also has an implicit income target. That is, the expectations are that the RBA will keep Py relatively stable (i.e. tolerate a higher rise in P if y is flat and vice versa) since its inflation target is an average over the business cycle.

Another way to look at that is to say the RBA is effectively operating an export price norm. (Which leads us back to Lars Svensson’s “fool proof” way out of a liquidity trap.) If income expectations do not collapse, there is not a flight to safe assets (such as money in a low inflation environment) and so spending does not collapse.

Read the whole article here.

About the Author

Marcus Nunes
João Marcus Marinho Nunes is a partner of Phynance Estratégias Quantitativas e Investimentos and a professor of Economics at Fundação Getúlio Vargas in São Paulo, Brazil. He also blogs here:

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