This past weekend, Goldman said that the Fed should tilt its mandate way more towards creating jobs, and be willing to target a specific level of Nominal GDP.
NGDP targeting has been a buzzy thing in economic circles for a while, with academics like Scott Sumner arguing that it could be the solution to our economic problems, but Goldman’s endorsement of it has taken it to the next level.
Everyone’s talking about it, including, today Paul Krugman.
Well, now Goldman is back for a second go round on this, building on Jan Hatzius previous note.
This time its Jari Stehn, offering up a history lesson from Sweden, where in 1930 the government made an effort to targe the price level.
Here’s the quick and dirty history from Stehn:
Sweden’s experience highlights a number of issues involved in adopting a price level targeting framework. (For details see Claes Berg and Lars Jonung, “Pioneering price level targeting: The Swedish experience 1931-1937,” Journal of Monetary Economics, 43(3), 1999.) These include:
- Definition of price stability. The authorities decided to stabilise the price level at the price level of the third quarter of 1931, to take place at once. Despite various requests, policymakers decided not to attempt to return the price level to pre-crisis levels and did not allow for a drift in the price level over time. Also, the Riksbank was not given any other goals, such as output or employment stabilisation.
- Temporary vs. permanent. The introduction of the price level target was intended and announced as a temporary step by the government. Once the conditions were at hand, a return to gold was planned for.
- Choice of price index. The Riksbank primarily targeted the CPI, and started publishing consumer prices on a weekly basis to allow for better monitoring. However, it did not tie its policy solely to stabilizing consumer prices and announced that “other price indices besides the Riksbank’s own index of consumer prices will also be taken into consideration.” For example, the Riksbank also paid attention to wholesale prices.
- Treatment of special factors. Policymakers stressed the need to disregard temporary factors like indirect taxes, customs duties and seasonal effects influencing inflation.
- Implementation. Changes in the discount rate and operations in the foreign exchange market were the most important instruments. Immediately after leaving the gold standard, the Riksbank did not intervene in the foreign exchange market and allowed the krona to float freely. But from July 1933 the Riksbank established a successful peg of the krona to the British pound that lasted until World War II.
The record suggests that Sweden’s experience with price level targeting was successful: consumer prices stabilised, real interest rates declined sharply and real GDP stopped contracting shortly after the adoption of the price level target (see exhibit above). Compared to most other countries, Sweden fared relatively well in the 1930s.
Stehn goes onto note some differences, notably that Sweden was coming off a gold standard, so its ability to get flexible with policy jumped by orders of magnitude. Also the economic situation was far more dire and deflationary. Still, Goldman takes it to mean that such a policy could, in theory, work, and ameliorate economic weakness.
Photo: Goldman Sachs