What is nominal GDP path targeting?

Nominal GDP path targeting is a communication policy advocated by economists for central banks. It involves the central bank publicly committing to maintaining the level of nominal GDP on a rising path, particularly aiming to return it to pre-crisis trends quickly.

The central bank holds significant power in nominal GDP targeting as it has a monopoly on the production of monetary base. By injecting more base money, the central bank can increase overall money expenditures, influencing the public's willingness to spend and invest.

Central bank promises are effective in most cases for achieving nominal GDP targets. However, liquidity traps may hinder the central bank's ability to accelerate nominal GDP growth temporarily. Despite this, nominal GDP growth typically has a direct impact on future economic activities.

Central banks convey nominal GDP targets through explicit promises and commitments. By setting a targeted path for nominal GDP, central banks can influence public expectations, leading to adjustments in spending, investment, and economic growth in the short and long term.

Inflation targeting poses challenges as it is susceptible to past failures and may not always generate sufficient nominal GDP growth. Central banks that focus solely on inflation targets may overlook other economic indicators and fail to address broader economic issues effectively.

Hyperinflation is a significant concern in monetary policy. Central banks must aim to balance nominal GDP growth to prevent hyperinflation, which can lead to economic instability. Stimulating the economy through nominal GDP path targeting can help mitigate inflation risks.

Interested individuals can learn more about nominal GDP by reading blogs and resources from economists like Scott Sumner, who extensively discuss the benefits and implications of nominal GDP path targeting. Further research on recent endorsements and policy details can provide additional insights into this economic strategy.