Economist comes out for NGDP path level target

Shit is getting real.

The economist on good and bad deflation by Scott Sumner

The Economist magazine has a very good editorial discussing good and bad deflation, and worries that the world is now experiencing (at least in part) the bad type. They conclude by urging central bankers to rely on a less ambiguous indicator:

Change the target

Policymakers should be more worried than they appear to be, and their actions to avert deflation should be bolder. Governments need to boost demand by spending more on infrastructure; central banks should err on the side of looseness. (Next month the ECB will start quantitative easing—and about time too.) Now is also the moment to consider revising the monetary rule book—in particular, to switch the central bankers’ target from the inflation rate that most now favour to a goal for the level of nominal GDP, the total value of spending in an economy before adjusting for inflation. With such a target there is no need to distinguish between good and bad price shocks. And the change in rules would itself send a signal that policymakers are serious about banishing the threat of deflation.

Central bankers change course slowly, and their allegiance to inflation targets runs deep. Conservatism often serves them well. But in this case it could cost the world economy dearly.

Notice that they advocate “level” targeting, which is very important in a world where the zero bound seems to occur with increasing frequency.

HT:  Peter Spence, Frank McCormick

PS. I also recommend Edward Hugh’s post on Spanish deflation.