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Here’s the respected Wolfgang MÃ¼nchau, columnist at the Financial Times:

This is a debate about nominal income targeting, where a central bank no longer stabilises the inflation rate directly but focuses instead on stabilising nominal gross domestic product. You can think of nominal GDP as the sum of real GDP and inflation. If real growth falls, the central bank would thus have to drive up inflation. Conversely, if real growth rises, the central bank would have to bear down on inflation much harder than it would do under the pure inflation targeting regime used by central banks such as the ECB. . . . It was probably inevitable that this long-lingering clash of economic cultures has finally come out into the open. As Europe’s recession gets worse, the ECB will soon have to adopt similar measures to those used by the Fed. It may even end up adopting a nominal income target, explicitly or implicitly, for the simple reason that the crisis in the eurozone is ultimately insoluble without annual nominal growth of at least 5 per cent. And I cannot see the Bundesbank support for any of it.

Nearly 4 years ago I and a few others started arguing that the crisis was being misdiagnosed by the economics establishment. Market monetarists argued that while banks did make some foolish loans, the deeper cause of the global financial crisis was a lack of nominal income; the resource that people, businesses, and governments have available for repaying nominal debts. The collapse in nominal income in the US and Europe was larger than anything since the 1930s, and hence most pundits and policymakers had no experience dealing with this situation.

It’s amazing how far we’ve come in less than 4 years. NGDP is the hottest idea in macroeconomics, and the lack of NGDP growth is seen as the root cause of the financial crisis. I recall in 2009 how commenters were incredulous when I said “NGDP,” not reckless banking, was behind the financial crisis. They thought I was crazy. Now it’s practically conventional wisdom. This means that all those “policy implications of 2008” from both the left (who blamed the banks) and the right (who blamed the regulators) will have to be completely re-thought. It’s about time.

HT: JimP

PS. I finally figured out how to type an umlaut—a sign of my respect for Mr. MÃ¼nchau.

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This entry was posted on September 24th, 2012 and is filed under Monetary Theory. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response or Trackback from your own site.



