Such targets are adopted by central banks to manage[1] national economic activity.
The concept of NGDP targeting was formally proposed by neo-Keynesian economists James Meade in 1977 and James Tobin in 1980,[list 1] although Austrian School economist Friedrich Hayek argued in favor of the stabilization of nominal income as a monetary policy norm as early as 1931 and as late as 1975.
[7][8] The concept was resuscitated and popularized in the wake of the 2008 financial crash by a group of economists (most notably Scott Sumner) whose views came to be known as market monetarism.
[9] They claimed that the crisis would have been far less severe had central banks adopted some form of nominal income targeting.
Monetary policy that ensures a NGDP target is met by definition avoids recessions in nominal terms, and by maintaining aggregate demand softens recessions in real terms albeit by adding inflation to ensure NGDP is level.
However, any nominal target could conceivably be either deflationary – or inflationary – if real growth sharply deviated from expectations in either direction.
Charlie Bean discussed optimal conditions for nominal income targets.
Then consider the expected market clearing level of the wage: Substituting into the labour demand equation, we write it as: Since output
, then the nominal income targeting eliminates the divergence of real output from its full information equilibrium.
It is therefore concluded that nominal income targets are optimal under the condition of perfectly inelastic labour supply.
[16] The Reserve Bank of New Zealand, the pioneer of inflation targeting, responded directly to a Scott Sumner report on inflation targeting, noting its concerns with GDP figures often being restated and therefore being unsuitable as a consistent monetary policy framework.
[19] They advocate a nominal income target as a monetary policy rule because it simultaneously addresses prices and growth.
[20] Proponents contend that national income targeting would reduce positive and negative fluctuations in economic growth.
In recovery from a recession, market monetarists believe concerns over inflation are unjustified and policy should instead focus on returning the economy to a normal growth path.
Similarly, such a targeting policy can help the economy accommodate both positive and negative supply shocks, while minimizing collateral damage.
"[11] Supporters included Lars Christensen, blogging at "The Market Monetarist",[21] Marcus Nunes at "Historinhas"[22] David Glasner at "Uneasy Money",[23] Josh Hendrickson at "The Everyday Economist",[24] David Beckworth at "Macro and Other Market Musings"[25] and Bill Woolsey at "Monetary Freedom.
"[26] As of fall 2011, the number and influence of economists who supported this approach was growing[27] largely the result of a blog-based campaign by several macroeconomists.
[28] Larry Kudlow, James Pethokoukis and Tyler Cowen[29] advocate NGDP targeting.
[32] In 1994, economists Robert Hall and Greg Mankiw described a nominal income target as a “reasonably good rule” for the conduct of monetary policy.
[33] Among policymakers, Vince Cable, ex United Kingdom Business Secretary, has described himself as "attracted" to nominal income targeting, but declined to elaborate further.
[34] Charles L. Evans, president of the Federal Reserve Bank of Chicago, said in July 2012 that "nominal income level targeting is an appropriate policy choice" because of what he claimed was its "safeguard against an unreasonable increase in inflation."
However, "recognizing the difficult nature of that policy approach," he also suggested a "more modest proposal" of "a conditional approach, whereby the federal funds rate is not increased until the unemployment rate falls below 7 percent, at least, or until inflation rises above 3 percent over the medium term.
One study argues that similar monetary policy performs better than real income targeting during crises based on a theoretical model.
[37] David Beckworth, a long-time proponent of NGDP targeting, produces a brief each quarter to describe the stance of monetary policy in the United States.