Knowing and Making

A response to Niklas Blanchard's post supporting Scott Sumner 's NGDP level targeting proposal (also posted as a comment on that page). My thoughts on this subject are not complete, but I've been thinking recently about how expectations are formed. I wonder about the following scenario: Let's say the Fed does adopt an NGDP level target with a 5% annual increase, and this becomes accepted as the new orthodoxy. How will future wage negotiations proceed? As an employee, I'd say to management: presumably you are good managers, and you expect to achieve growth in the company's revenues, profits and productivity at least in line with the economy as a whole. (I've yet to meet a manager who'd admit that they are not as good as the national average manager). Therefore, you'd expect your top line revenues to increase by at least 5%, given a fixed amount of labour in your company. What's more, now that the Fed has successfully achieved a 5% NGDP in...

The UK grew at an unexpectedly strong 1.1% rate in the second quarter, according to the ONS. Unexpected to the consensus of economists, that is - some of us are not so surprised. It has seemed clear - anecdotally, but from a wide range of conversations - that the economy has been fairly strong in the last few months - and with unexpectedly low growth in Q1, a rebound was already likely to show up the Q2 figures. This means that over the last year, the economy has grown by 1.6% - including a quarter of negative growth in 2009 Q3. If this quarter's rate is sustained - which it probably won't be - we will have almost 3% growth from October 2009 to September 2010. Even if it falls back to 0.7%, we will still have achieved a 2.5% growth rate. Despite George Osborne's sheepish attempts to take the credit - you can just tell that he knows better - this is a clear vindication of the last government's policies. Or rather, as Chris Dillow hints , it vindicates the last go...

How interesting. The Bank of England, whose notional target is a 2% inflation rate (CPI), is now looking at cash GDP in deciding its quantitative easing policy. That's according to Stephanie Flanders, who has an intelligent writeup of the Bank's considerations in deciding whether to print another £25 billion to purchase government and corporate bonds. Scott Sumner will surely be pleased to hear it: he has been advocating for a while that central banks should target nominal GDP . What's more, they are looking not at the rate of change, but at: ...the Bank's expected path for cash GDP in the next year or two... implying that the target is an absolute level, so if there's a shortfall this year they may even try to make it up next year. Now there's some way to go from using NGDP as one of the considerations in guiding this month's policy, to setting a formal rising path at 5% a year, trading a futures index and giving up inflation targets altogether. But this i...