The latest from Joe Gagnon:

To maximize the potential benefits of sound monetary policy, the Fed should seriously consider the proposals of Christina Romer and Michael Woodford to target a fixed path of nominal GDP, the broadest measure of economic activity in dollar terms. The path should be based on a year of normal conditions, such as 2007, and should increase at a rate of 4.5 percent, which would allow for average growth of 2.5 percent and average inflation of 2 percent. Because we are far below such a path right now, it would take a few years of growth above 2.5 percent and/or inflation above 2 percent to return to normal. This policy would allay market fears of premature Fed tightening while being consistent with the Fed’s stated long-run inflation goal of 2 percent.

In my post yesterday I showed that Australia (and Poland) had not suffered the fate of many other countries exactly because they did not allow nominal spending (NGDP) to crash. I provide additional details on Australia.

The charts below shows that during the 2006-08 commodity price boom nominal spending went up mostly reflecting a rise in inflation. The commodity price collapse after mid-08 brought nominal spending back to trend. Unemployment has returned to pre-commodity boom levels, averaging 5.2% for more than one year and headline inflation has been contained, partly reflecting the drop in commodity prices of late. Importantly, the “Great Recession” that has afflicted a large number of countries has passed Australia by, so real output growth has remained robust!