The Economist Magazine Takes a Closer Look at NGDP Targeting

Here is the article.  It does a fair job discussing the pros and cons of such a rule.  Among the advantages for NGDP level targeting is that it better handles supply shocks:

They could also react more appropriately to supply shocks. Take the example of an economy that is hit by a negative supply shock through high oil prices depressing output and raising inflation. An inflation-targeting central bank may feel compelled to tighten policy, worsening the slump in output, whereas one mandated to hit NGDP could be more flexible. There could be advantages, too, in the opposite case where a positive supply shock through productivity-enhancing new technology boosts real GDP growth while lowering inflation. An inflation-targeting central bank would respond by easing monetary policy, which could produce asset bubbles, whereas an NGDP-targeting central bank would hold steady. Certainly inflation would be more volatile, but the overall economy would not be.

One of the disadvantages is how to adopt and implement a new rule when it is not widely known:

 For all its theoretical merits, a switch to NGDP targeting would throw up some new problems—and old ones. The Fed has not exactly sat on its hands since the financial crisis began in 2007, so it is far from clear it could easily reach the new goal.

The short answer is that the Fed would announce (1) its targeted growth path for NGDP and (2) commit to buying up as many securities as needed to reach it.  Knowing that the Fed would be willing to buy up trillion of dollars of assets if necessary to hit its target would cause the market itself to do much of the heavy lifting.  That is, the public would adjust their portfolios in anticipation of the Fed buying up more assets and in the process cause nominal spending to adjust largely on its own.   I go into more detail here how this would work, but the key point is the Fed would be better managing nominal spending expectations.  Such a rule would have better contained nominal spending expectations in 2008 and avoided the worst of the crisis. Just look at Sweden who effectively does something like a nominal GDP level target.

Update: Bill Woolsey provides much more commentary on The Economist article.