Reasserting Monetary Policy: Sumner’s Nominal GDP Targeting and Beyond

Abstract

Sumner’s (2016) article in Foreign Affairs reasserts the potential of monetary policy to influence economic conditions – following years of suboptimal growth in the US and elsewhere and an unraveling of consensus about central bank practice. This review provides theoretical and economic history context. From the 1960s onward, consideration of money quantity variables was prominent in monetary policy discussion. By the 1990s, central bankers had transferred focus to interest rate or inflation targeting, and sometimes to a combination of the two. Central bankers have proved effective at meeting, or approaching, inflation objectives – and doing so helps to stabilize market expectations for what the future price level will be. Sumner argues that if central bankers can stabilize inflation expectations, then they could also meet nominal GDP (NGDP) targets – and thereby stabilize expectations regarding future growth, unemployment, and interest rates. Also, NGDP targeting is counter-cyclical in its essence.

The depth and length of the Great Recession were largely a result of contractionary monetary conditions from the third quarter of 2008 onward. But financial crises, including in that of 2007-2008 in the US, can trigger or contribute to downturns. NGDP trends are not a good predictor of such crises, which often have origins in compromised capital structure. A further limitation is that NGDP targeting emphasizes internal balance (domestic prices and employment) almost to the exclusion of external stability as an aim of monetary policy. Even if the primary goal remains internal balance, data from foreign exchange markets and from non-domestic price changes provide important information about the stance of monetary policy.