E Nominal GDP Targeting And Market Monetarism Made Easy With Graphs

NGDP Targeting is an easy concept to understand (with graphs) and so I will try to share it here. I am sharing this as a layman, a financial contributor, not as an economist. I have not made a judgement about the merit of the system, only that it makes perfect sense and that monetary policy has been unnecessarily blind to the reality on the ground.

The economists who target Nominal GDP are known as market monetarists. Sharing this relatively new school of economics on a basic level has to then be, a sharing by example, not by abstract academic thinking.

I have written a little article showing the terms involved in a more thorough understanding of the subject, and why I think it could work except for the problem of recent bond behavior. And of course, serious students can learn from the many blogs that exist teaching the abstract details of what the school stands for. But here is a simple approach for those who are not economists.

Simply put, Nominal GDP is growth plus inflation. Targeting NGDP, then, becomes an option to central bank targeting of inflation, which, according to the market monetarists, does not show the entire picture. The MMers like to target 4-5 percent, as it is a natural rate based on Wicksell's study. So, if inflation is only at 1 percent, but growth is at 3-4 percent, all is stable in this system. If growth is 1 percent, inflation should be bumped up to 3-4 percent. But that rate of inflation should only be higher when growth is lower.

Real GDP is growth minus inflation. If only inflation is targeted as is done now, and growth happens to be strong, inflation becomes too high and prices are distorted. But if inflation is stable and NGDP is dropping, the nation could be plunged into turmoil as we see by the following chart. [Nominal GDP is also known as the chained dollar GDP or the current dollar GDP.]

[Note: As you can see, for FRED, the Nominal GDP graph is simply the GDP graph as distinguished from the Real GDP graph.]

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Disclosure: I am not an investment counselor nor am I an attorney so my views are not to be considered investment advice.

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