NGDP level targeting

by Eliezer Yudkowsky Sep 14 2016 updated Oct 24 2016

Central banks ought to regularize the total flow of money to increase at a predictable 5% rate per year, and doing this would solve a surprising number of other problems.

Level targeting of the ngdp Nominal Gross Domestic Product is the policy suggestion that a [ central bank] should try to regularize the [ total flow of money] through an economy--the sum of all money exchanging hands in transactions--and make this quantity rise on a predictable path. For example, an appropriate goal for the US Federal Reserve might be for NGDP to rise at a rate of 5%/year.

The background theory of [ macroeconomics] which supports NGDPLT is market monetarism, a view of the economy which sees the total [ flow of money] across all transactions as a central monetary fact about a nation or [ currency region]. This [ includes even wasteful or destructive spending]; market monetarism does [ not say] that NGDP is a good [ proxy] of a nation's health. Rather, market monetarism suggests that looking at the total flow of money across all transactions is the best place to start in understanding other monetary phenomena like price trends, nominal incomes, recessions, credit creation, and so on.

A surprising and pragmatically important implication of this NGDP-centric theory is that many different societal issues, traditionally seen as independent but related jobs taken on by central banks and governments, could all be simultaneously solved by telling central banks that their [ only job] is to regularize growth in the total flow of money across all transactions--e.g., keep the [ nominal] money-flow increasing at a steady 5% per year, with any shortfalls or overshoots being made up the next year ("targeting the path").

If the background theory is true, NGDP level targeting would:

All of these issues can plausibly be seen as being driven by the total amount of money everyone is spending. If the background theory of market monetarism is correct, then NGDPLT solves all of those problems simultaneously, because:

Frequently proposed refinements of NGDPLT often include: