Nominal GDP: Target Or Benchmark?

from the Richmond Fed

Some observers have argued that the Federal Reserve would best fulfi ll its mandate by adopting a target for nominal gross domestic product (GDP). Insights from the monetarist tradition suggest that nominal GDP targeting could be destabilizing. However, adopting benchmarks for both nominal and real GDP could off er useful information about when monetary policy is too tight or too loose.

Congress has mandated that the Federal Reserve System pursue the dual goals of maximum employment and stable prices, the latter currently specifi ed to mean 2 percent average infl ation. However, during the Great Recession, both employment and the rate of infl ation fell sharply. In 2007, the unemployment rate averaged around 4.5 percent, while infl ation (as measured by core personal consumption expenditures, or core PCE) averaged just over 2 percent. In 2009, the unemployment rate reached 10 percent, while core PCE infl ation fell to 1 percent.

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Source: http://www.richmondfed.org/publications/research/economic_brief/2015/pdf/eb_15-04.pdf