The FOMC minutes released today reveal a big change in terms of policy options being discussed by the Fed. For the first time the FOMC has discussed the possibility of targeting the level of NGDP. Here is the key excerpt (my bold):
With short-term nominal interest rates constrained by the zero bound, a decline in short-term inflation expectations increases short term real interest rates (that is, the difference between nominal interest rates and expected inflation), thereby damping aggregate demand. Conversely, in such circumstances, an increase in inflation expectations lowers short-term real interest rates, stimulating the economy.Participants noted a number of possible strategies for affecting short-term inflation expectations, including providing more detailed information about the rates of inflation the Committee considered consistent with its dual mandate, targeting a path for the price level rather than the rate of inflation, and targeting a path for the level of nominal GDP.
This is huge. The FOMC is now discussing a NGDP level target, a topic that has has been promoted in the economic blogosphere. For those of us who have been advocating this approach for some time (e.g. here and here) this is incredibly refreshing.
Scott Sumner — a lonely crusader for NGDP targeting for two decades — is also celebrating. A number of those supporting NGDP targeting have a background in Hayekian macroeconomics. And, as Lawrence White and others point out, as a general proposition Hayek supported the idea of maintaining a yo-yo-free volume of nominal spending. Sumner bluntly counts Hayek as a targeted NGDP supporter. That may be a bit strong, but it is plausible to assume that Hayek’s economics would lead him to favor NGDP targeting over price level targeting, inflation targeting, aggregate demand pumping, or any other Fisherian, Casselian, or Keynesian program.
Hayek in 1978:
“The moment there is any sign that the total income stream may actually shrink, I should certainly not only try everything in my power to prevent it from dwindling, but I should announce beforehand that I would do so in the event the problem arose.”