Nominal income targeting gets some attention from Ramesh Ponnuru over at National Review Online:
There may be a way to avoid the worst fears of both camps. Economists Scott Sumner of Bentley University and David Beckworth of Texas State University are among those who have suggested that the Fed should move gradually toward a new, more rule-bound and predictable monetary policy. The first step would be to signal to the markets that the Fed is willing to do whatever it takes to reach 2 percent average inflation. Over time the Fed would move to stabilize and then slow the growth of nominal GDP, which is the size of the economy as measured in a given year’s dollars. If the nominal GDP target was for 3 percent growth and the economy grew by 2 percent, there would be 1 percent inflation.
That policy would bind the Fed to a rule, thus reducing the uncertainty that recent policy has generated, including the risk that we will get galloping inflation at some point in the future. But it is superior to simply targeting the inflation rate, Beckworth argues, because it incorporates two worthwhile types of flexibility. It allows the price level to move in response to supply shocks: An oil embargo would cause prices to rise, a technological advance would have the opposite effect. And it allows the money supply to move up and down in response to the demand for cash: In periods such as late 2008, when people were holding on to their money, the Fed would have loosened more than it did. But since the rule would have required tighter money during the boom years, the financial crisis might not have been as severe in the first place.
This policy would, in the short run, increase inflation, but to a low rate; we have averaged higher than 2 percent inflation for each of the last five decades. Eventually it would yield a gentle, long-term deflation: Prices would fall during periods of productivity growth. (George Selgin, an economist at the University of Georgia, has made an elegant case that productivity-driven deflation is not dangerous.) Beckworth cites evidence that both Milton Friedman and Friedrich Hayek favored something like this approach of stabilizing nominal spending.
Read the whole thing.