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:
- Entirely obviate the issue of [ too-big-to-fail] banks.
- Restrict [ boom-bust] and [ asset-bubble] phenomena to particular industries, rather than there being a national-level [ business cycle].
- Prevent national-level [ unemployment] or [ underproduction] driven by a widespread phenomenon of businesses and consumers having [ too little money].
- Obviate all considerations of using [ government spending] to "[ stimulate the economy]", leaving only the question of whether the government spending is worth its cost.
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:
- A big bank going bust might still present inconveniences for that bank's particular customers, but…
- No matter how much money was [ destroyed] by that bank's bad loans, the central bank would create the right amount of [ compensatory money] to keep total national spending stable (and then withdraw that money if more loans were made later).
- The same total national [ money-flow] would be available on average to [ repay the loans] made by all uninvolved banks, preventing [ contagious busts] except by direct contact.
- Even many banks going bust simultaneously would not change the total money-flow available for businesses and consumers to make purchases or [ repay existing loans]. The Wall Street catastrophe would have been mostly [ decoupled] from Main Street.
- A particular industry might see a flood of [ excess investment] followed by a loss of enthusiasm, but…
- No amount of enthusiasm or loss of enthusiasm on a national level, could change the fact that, across all business sectors in total, exactly 5% more money would flow each year.
- Thus, no amount of enthusiastic [ credit creation] could result in the national economy as a whole seeing too much money flowing, since the central bank would not-create or even destroy a compensating amount of money.
- Thus, "[ business cycles]" would be local to particular regions or business sectors, rather than countrywide phenomena.
- A particular business might lose its customers and be unable to pay its employees, or a particular region might see obsolete factories going unused, but…
- Every year without fail, 5% more total money-flow would be available to [ pay all employee salaries], and be spent on purchases that would support businesses paying their employees, etcetera; the total flow of money in this system across all exchanges would be regularized.
- There would be no national-scale phenomenon of [ unused factories and idle labor] due to nobody having enough money to employ the people and run the factories. (Production shortfalls driven by [ aggregate demand shortfalls] should disappear.)
- A new highway might still be a prudent government purchase if the region [ really needs a new highway], but…
- There would be no need to "[ stimulate]" the national economy by spending, since productive capacity will not be going [ unused] on a national scale due to insufficient [ money flowing].
- Not just under NGDPLT, but [ in any other case where a central bank is already effectively targeting a nominal variable] (such as [ inflation]), government spending or cutbacks is [ automatically neutralized] by the central bank forgoing or increasing a corresponding amount of [ money-creation].
- This was one of the [ major experimental tests of market monetarism in 2013], when the US government's "[ fiscal cliff]" triggering was [ predicted by many macroeconomists] to result in increased unemployment and potential recession, while market monetarists [ predicted] that if the Federal Reserve created a corresponding amount of money, few if any macroeconomic effects should be visible. The second prediction seems to have been correct.
Frequently proposed refinements of NGDPLT often include:
- Targeting [ per capita] [ nominal] income instead of NGDP. In fact, [ NGDI] is often a [ better estimate] of what will retrospectively appear to have been the correct NGDP after revisions, than initial unrevised direct measurements of NGDP.
- [ Targeting market forecasts] or using a [ prediction market] to steer the central bank's money-creation.
- Revising the NGDP path rate (some years ahead, to avoid any unexpected changes or shocks) to take into account changes in estimated [ productivity growth]. A country where real productivity is increasing faster, needs a higher NGDP/NGDI growth rate.