A couple of comments.
First, I really liked Mark Thoma's take on what caused the financial crisis. While acknowledging the role the Fed played, he contends no one factor is entirely responsible for the current crisis. Rather, this economic debacle is the result of a perfect storm of developments coming together at just the right time. This is a view I have come to
adopt--early on I tended to put too much emphasis on the Fed--in my thinking.
Second, I was really glad to see Mark and Scott discuss nominal income targeting as an alternative way to conduct monetary policy. This approach makes the most sense to me because it is capable of handling both aggregate demand and aggregate supply shocks--something that cannot be said for inflation targeting. As I noted
earlier:
Such a [nominal income targeting] rule would (1) force the Fed to be more vigilant in stabilizing nominal spending while (2) allowing it to avoid the distraction of rigidly following inflation. Nominal spending shocks, after all, are the real source of macroeconomic volatility while inflation is merely a symptom of these shocks. Moreover, inflation can sometimes can be hard to interpret--Is the high(low) inflation due to positive(negative) aggregate demand shocks or negative(positive) aggregate supply shocks?--and as a result monetary policy that targets inflation may make the wrong call.
I would also note that one of the critiques of such a rule is that it would be difficult to implement in practice since GDP numbers come out so infrequently. My reply to this critique is that there are just as severe problems in implementing an inflation targeting rule like the Taylor rule. Here, ones needs to know the elusive output gap and the neutral interest rate. With a nominal income targeting rule, however, one could in principle use monthly indicators for nominal GDP--coincident indicator and CPI--to estimate the nominal GDP on a monthly basis. Moreover, Scott mentioned an even better solution: set up a futures market for nominal GDP. This would allow for a forward looking nominal income targeting rule.
Thanks Mark and Scott for a great discussion.
Update: here is a nice introductory article on nominal income targeting from the St. Louis Federal Reserve.
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