Nominal Targeting: "Are You Being Served?"

Many folk of a certain age here in the U.S. remember this long running British comedy from the 1970s and 1980s. And just like the enthusiastic staff at Grace Brothers, today's customer finds market monetarists ready and willing to explain why their "product" of nominal targeting is superior to interest rate targeting. Often the first question a commenter, ah, "customer" asks is "What's in it for me?" Or, what is supposedly better about nominal targeting in the first place? Some are confused by the impersonality of the measure itself, which may make them think it will somehow get hijacked at the first "landing" i.e. the Cantillon effect.

But there's not really a landing pad, and money certainly would not get hijacked because of nominal targeting. As to whether someone actually keeps money away from the "bad guys" with interest rate targeting is anyone's guess, I suppose. Helicopter drops are a captivating image to be sure (where's mine, Ben Bernanke?) but the entry of money throughout an economy is a rather mundane affair. While money distribution begins with open market operations, it ends up in all the same places. Certainly the "new" money (if indeed one could designate that from some previously printed batch) isn't different from the other. What is significant is the measurement of the time frame itself, or the velocity. While there are aspects of velocity I'm still learning, this much I do know: there are lots of things we need to do with our money and many places it needs to go. The same is true for everyone else. When someone gets the arbitrary notion that enough money has been printed already, someone is likely not to get paid, and then someone else won't get paid...in other words it really matters how many batches get printed in a timely fashion, so that your neighbor keeps his job, and his neighbor keeps his business open and running.

Another customer complains, "The Federal Reserve has printed enough money already. If it prints any more you are just going to raise prices!" However, there's a good chance the particular price you have in mind is being wiggled about for reasons that may have little if any thing to do with the Fed. In fact, that's an important point about nominal targeting: your actual relation to the price you see becomes more clear. Not exactly your individual income, of course, but the combination of your income with that of others, compared to what you need to purchase overall. While the relation may not be immediately obvious, with time and NGDPLT, it would become easier to see whether distortions are actually occurring. And the best part is something as simple as lines on a graph can show whether the total relation between overall income and consumption actually changes. Anyone my age can look back on previous decades to see that when NGDP was not well targeted, there was a good chance it may have been creating problems with getting and keeping a job as well. While interest rate targeting can show lots of things, I don't think it really had a good graph for that particular observation.

Some customers may not see where the product of nominal targeting is significant because it has already been "tried". During the Great Moderation it was in fact utilized successfully alongside interest rate targeting, and if one just looks at numbers and statistics they could miss the overall point of the measure. Because of that, some may just stress the fact that we need stimulus now and then we can just return back to the same program of interest rate targeting once everything turns back to normal. Only there's one problem: the last time we found ourselves at the zero bound was the Great Depression. It took decades before everything returned to normal and interest rate targeting could finally be used effectively again.

But don't just take it from me, I'm a newbie, and so I should point out some of the other market monetarist "staff and management" from the sidebar, in alphabetical order: Bonnie Carr at dajeeps, Marcus Nunes (best graphs ever) at Historinhas, David Beckworth at Macro and Other Market Musings, Bill Woolsey at Monetary Freedom, Lars Christensen at The Market Monetarist, Scott Sumner at The Money Illusion, David Glasner at Uneasy Money and Nick Rowe at Worthwhile Canadian Initiative. All of these friendly (mmm maybe occasionally grouchy!) people are glad to be of service.