In a comment in Scott Sumner’s post, Arnold Kling says:

(SS) “MMs predict that NGDPLT will reduce the severity of the business cycle. Not easy to test, but certainly testable over a period of time.” (AK) In fact, this is what I believe is the core irrefutable proposition of market monetarism. Suppose that the Fed announces that it is changing to a level target for nominal GDP. And suppose that the business cycle continues just the same. There are two possible responses from market monetarists. 1. Say that this was a valid test. 2. Say, “aha! They said they were doing NGDPLT, but look. NGDP was all over the map. Obviously, they were not really doing NGDPLT. They decided to do something else.” My snark about market monetarism being irrefutable reflects my uncharitable (and untestable) belief that we would see (2).

A test has already taken place. The charts indicate the volatility of NGDP growth and the (resulting?) volatilities of real output and inflation. The “test” divides the periods according to their particular “characteristics” (“Golden Age”, “Great Inflation”, “Great Moderation” and “Great Recession”).

During the “Great Moderation” NGDP was (comparatively) stable, i.e. was “not all over the map”. At the time the Greenspan Fed was not explicitly targeting anything, but by keeping NGDP growing along a stable growth level path the prize was overall economic stability. I would think that the result would be similar if the Fed were explicitly targeting an NGDP Level path

This outcome is not observed in the other periods, when NGDP growth was “unstable” to differing degrees. The “Great Inflation”, for example, is the natural outcome of an unstable and rising NGDP growth.

The long run neutrality of money shows up in the comparison of the “Golden Age” and the “Great Inflation”. Much higher (and volatile) NGDP growth in the latter period is reflected wholly in higher (and more volatile) inflation, with real GDP growth behavior being very similar in the two periods.

Bernanke´s unrelenting pursuit of an inflation target made him lose sight of overall nominal stability. While inflation has remained (“excessively”) contained, real growth has taken an undesirable ‘direction’.

I also believe that the “inflation target paradigm” is preventing a regime shift taking place. It´s not impossible, after all Japan has done it (but only after a long period of suffering through the dogma of (in the case of Japan) “zero inflation”).

Update: Scott has given his reply to Kling.