Nominal income target

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A nominal income target is a hypothetical policy conducted by a central bank that targets the future level[1] of economic activity in nominal terms (i.e. not adjusted for inflation). The central bank could target Nominal Gross domestic product (NGDP) or Nominal Gross domestic income (GDI)[2] and use monetary policy, including conventional tools such as interest rate targeting or open market operations and unconventional tools, such as quantitative easing or adjusting the interest rate on excess reserves to hit the target. The concept of NGDP targeting was originally proposed by James Meade (1978)[3][4] and James Tobin (1980).


The central bank using the above tools specifies the economic activity of all final goods and services produced within a country in a given period without adjusting for changes in the price level (inflation/deflation). At regular intervals, such as calendar quarters, a target level for nominal Gross Domestic Product is specified, with the levels growing at a steady rates.[5] Proponents (see Market monetarism) contend this will reduce fluctuations in economic growth, both positive and negative. In recovery from a recession, market monetarists believe excessive worry about inflation is unjustified and policy should instead focus on returning the economy to a normal growth path.

Market monetarists are skeptical of traditional monetarists' use of monetary aggregates as tools for policy instruments and prefer to use forward-looking markets as a tool to evaluate current monetary policy.[6] Market monetarists advocate for a level nominal GDP target as a monetary policy rule because it simultaneously addresses the price level and growth in an economy.[7]

Monetary policy which would ensure a NGDP expectation is met (e.g. a level that reflects 5% NGDP growth from a normal trendline) by definition avoids recessions in nominal terms, and by maintaining aggregate demand also avoids deep recessions in real terms. The common target of five percent growth is often selected as it is anticipated to comprise on average three percent real growth (the historical average growth rate during the great moderation) and two percent inflation (as currently targeted by many central banks).[8] An alternative target of three percent is sometimes proposed with nominal growth mirroring the real growth rate, and hence zero average inflation. This target has the potential downside of being deflationary if real growth exceeds the three percent growth in nominal terms, implying a negative rate of inflation (i.e. deflation). However, any NGDP target could conceivably be either deflationary - or indeed even highly inflationary - if real growth sharply deviated from expectations in either direction.

Because GDP and GDI figures come in after the actual economic activity has occurred, a future estimate is required; a potential option for the expected future estimate is to create an NGDP futures market and allow the market to indicate expected demand for money. The central bank would then conduct operations to move the futures price onto its target level, analogous to what it now does with the federal funds rate.

Level Target[edit]

When supply or demand shocks or policy errors push NGDP growth above or below the target, market monetarists argue that the bank should target the level rather than the rate of growth of NGDP. So if a recession pushes NGDP to 2% for one year, the bank should add the shortfall to the next year's target to return the economy to trend growth.[9] The short name for this policy is NGDPLT. The above comments about NGDP targeting being potentially deflationary or highly inflationary also apply to this proposal.

Related policy and discussion by Central Banks[edit]

As of 2011, it is thought[10] that the Bank of England is targeting nominal income and not inflation (at least in the short term), as inflation is greater than one percent above its target, and income is growing at nearly five percent.[11]

The Federal Open Market Committee of the US Federal reserve also has discussed the possibility of a nominal income target on September 21, 2010.[12]

The Reserve Bank of New Zealand, the pioneer of inflation targeting, responded directly to a Scott Sumner report on Income targeting, stating "The Reserve Bank said that nominal GDP targeting was a complex, technical approach to monetary policy. GDP was subject to large revisions, making policy difficult to communicate."[13]


As of Fall 2011, the number and influence of economists who supported this approach was growing.[citation needed] The leading proponent was Scott Sumner, with his blog "The Money Illusion."[9] Supporters include Lars Christensen with "The Market Monetarist," Marcus Nunes with "Historinhas," David Glasner with "Uneasy Money," Josh Hendrickson with "The Everyday Economist," David Beckworth with "Macro and Other Market Musings," and Bill Woolsey with "Monetary Freedom." Australian economist John Quiggin also supports nominal income targeting, on the basis that "A system of nominal GDP targeting would maintain or enhance the transparency associated with a system based on stated targets, while restoring the balance missing from a monetary policy based solely on the goal of price stability."[14] Supporters of nominal income targeting often self-identify as market monetarists, although market monetarism could also be construed as a broader term.

Among policymakers, Vince Cable, United Kingdom Business Secretary, has described himself as "attracted" to nominal income targeting, but declined to elaborate further.[15] Charles L. Evans, president of the Federal Reserve Bank of Chicago, said in July 2012 that "nominal income level targeting is an appropriate policy choice" because of what he claimed was its "safeguard against an unreasonable increase in inflation." However, "recognizing the difficult nature of that policy approach," he also suggested a "more modest proposal" of "a conditional approach, whereby the federal funds rate is not increased until the unemployment rate falls below 7 percent, at least, or until inflation rises above 3 percent over the medium term."[16]

Few academic publications analyze nominal income targeting, although it has been shown that similar monetary policy performs better than real income targeting during a crisis.[17]

Jeffrey Frankel has argued that there are good reasons for a developing country to target its NGDP,[18] since:

  • A developing country needs to follow a credible economic policy with which it can survive.
  • The IMF often tells a developing country to target its inflation rate, but inflation targeting makes it difficult for the country to handle an adverse supply shock or a terms-of-trade shock, because monetary expansion increases the prices of imported goods. If a country targets its inflation rate when it suffers negative supply shocks, then the growth of its real GDP becomes volatile.
  • Negative supply shocks often occur in developing countries, because their economies are likely to be damaged by natural disasters and social unrest. They tend to suffer from adverse terms-of-trade shocks as oil prices go up and their commodity export prices decrease. India is regularly subject to supply shocks, such as good or bad monsoons.

If a country targets its NGDP, Frankel argued, it gives the country more flexibility in dealing with such shocks, and it can achieve a steady growth in [nominal] output.


  1. ^ "Scribd". Scribd. 2012-01-18. Retrieved 2012-09-05. 
  2. ^ GDI is thought to be a more accurate measure
  3. ^ Nominal GDP targeting, Left, Right? Jeffrey Frankel, Project Syndicate, May 2, 2013
  4. ^ Nominal income targets: an old wine in a new bottle Charlie Bean, Speech at the Institute for Economic Affairs Conference on the State of the Economy, London, Bank of England, 27 Feb 2013
  5. ^ Changing target Should the Fed target nominal GDP? Title: Changing target Publication: The Economist Publisher: The Economist Newspaper Limited Date: Aug 27, 2011
  6. ^ Market Monetarism: The Second Monetarist Counter Revolution
  7. ^ Why a NGDP (Nominal Gross Domestic Product) Level Target Trumps a Price Level Target
  8. ^ "Central Bank News: Inflation Targets". 2011-09-25. Retrieved 2012-09-05. 
  9. ^ a b Sumner 2011
  10. ^ "Bank comes close to admitting it's targeting nominal GDP growth". The Daily Telegraph (London). August 16, 2011. 
  11. ^
  12. ^ "Minutes of the Federal Open Market Committee". September 21, 2010. Retrieved October 18, 2011. 
  13. ^ RBNZ defends monetary policy target
  14. ^ Quiggin, John. "Inflation target tyranny". Retrieved 2012-01-28. 
  15. ^ "Vince Cable hints coalition banking row is brewing". The Guardian. 2012-03-24. Retrieved 2012-05-17. 
  16. ^ Evans, Charles (9 July 2012). "A Perspective on the Future of Monetary Policy and the Implications for Asia". Federal Reserve Bank of Chicago. Retrieved 2012-07-12. 
  17. ^ Benchimol, Jonathan; Fourçans, André (2012). "Money and risk in a DSGE framework : A Bayesian application to the Eurozone". Journal of Macroeconomics 34 (1): 95–111, Abstract. 
  18. ^ Emerging and developing countries should work on targeting NGDP Jeffrey Frankel, theguardian, 24 June 2014

Further reading[edit]

Sumner, Scott (24 July 2013). "A Market-Driven Nominal GDP Targeting Regime". Mercatus Center. 

External links[edit]