I am concerned that some sources of continued monetary injection could be bad. For example, if all of the cash creation was going into QE, I’d expect to see not enough trickle-down.
This is absolutely a valid concern. My preferred version of NGDP targeting would pair a VAT with a UBI. Any time the central bank wanted to raise NGDP, it would increase the UBI or decrease the VAT and anytime they wanted to lower NGDP they would decrease the UBI or increase the VAT. I actually do think that you can do NGDP targeting using interest rates/QE alone, but this requires a much stronger “signaling” component from the central bank where they commit not to raise interest rates/pull back on QE until NGDP is back above target.
1) you can only reasonably print much money if you have a reserve currency or you end up with crazy inflation because your foreign debts require more of your currency to pay them off
You can’t actually get out of control inflation simply by doing NGDP targeting. Reserve currency or not, sustained (above target) inflation occurs when the government spends more than it taxes and overrides central bank independence in order to monetize the debt.
2) even if you have a reserve currency, there’s an important question about whether adding 5% to NGDP causes more or less than 5% of national debt growth that year. If it requires more, your debt:GDP ratio will just keep going up in an unsustainable fashion.
The debt:GDP ratio is determined by the savings rate and productivity growth rate of the underlying economy. Unfortunately in the developed world, we’ve seen the savings rate grow and productivity growth stagnate due to a combination of wealth inequality and an aging population. These are both serious concerns, but raising interest rates and driving the economy into recession is definitely not going to help. Looking at the 2008 recession, the result was to drive down fertility and wage growth for the bottom 20% didn’t really happen until we reached near-full employment in 2019.
Regarding Australia, I don’t understand how FX can target NGDP and everything I can find just says that Australia is considering doing NGDP targeting after 25 years of inflation-targeting
I think I was just misremembering here. However one way you could target NGDP (if you aren’t a reserve currency) is just to raise/lower your exchange rate target when you want to adjust NGDP. This solves the “pushing on a string” problem with low interest rates, since it is always possible to lower your exchange rate by selling domestic currency and buying the reserve currency.
Oops, you’re obviously right about not getting runaway inflation from NGDP targeting. Not sure if there’s still an issue there with printing when not a reserve currency, but maybe not.
Oops, I actually meant public_debt:GDP. I think growth there continues to be a concern, because it’s not “determined” in the way you said afaik, and e.g. COVID?
Ah, the FX idea is good! I still don’t actually understand some of the core of NGDP targeting—my reasoning runs into a contradiction because it seems like if you lower your FX, your nominal GDP should go up because your produced goods are now worth more of your own dollars, but that would mean that you’ve actually increased the amount of cash needed to make all the transactions go through the economy, such that you’ve created a cash bottleneck where there wasn’t one, which is the opposite of what is supposed to happen. Perhaps the lowering of your FX requires increasing the currency in circulation to a greater extent than the drop in its value, such that you end up with more currency x value at the end?
I actually meant public_debt:GDP. I think growth there continues to be a concern, because it’s not “determined” in the way you said afaik, and e.g. COVID?
NGDP targeting theoretically doesn’t care one-way or the other about the amount of public debt (assuming an independent central bank). If the government spends too much money (due to a crisis like Covid), the interest rates it has to pay will rise and it will face a sovereign debt crisis. Two outcomes are possible: 1) the government declares bankruptcy, can no longer borrow on the public markets, and is forced to raise taxes or cut spending 2) the government mandates that the central bank buy public debt, monetizing the debt and producing above-target inflation. Case 2) (which is by far the more common one) is no longer NGDP targeting since the central bank ceases to independently follow its NGDP target.
I actually can’t think of a real-world example of case 1). When governments face a sovereign debt crisis and respond with austerity, NGDP generally falls well below trend. See, for example, Greece. I’m not sure why this is, but probably because austerity is forced on the country by an outside institution (usually the IMF or in Greece’s case the ECB) which cares more about getting its debts repaid than about making sure NGDP stays on-trend.
if you lower your FX, your nominal GDP should go up because your produced goods are now worth more of your own dollars
If the central bank sells FX and buys domestic currency, this will cause the value of you domestic currency to rise, meaning the price (in domestic dollars) of goods produced in your country will fall.
Obviously the central bank can only do this if it has FX reserves to sell. If not, then it has to raise interest rates, which should similarly cause the value of the domestic currency to rise (and nominal GDP to proportionately fall).
This is absolutely a valid concern. My preferred version of NGDP targeting would pair a VAT with a UBI. Any time the central bank wanted to raise NGDP, it would increase the UBI or decrease the VAT and anytime they wanted to lower NGDP they would decrease the UBI or increase the VAT. I actually do think that you can do NGDP targeting using interest rates/QE alone, but this requires a much stronger “signaling” component from the central bank where they commit not to raise interest rates/pull back on QE until NGDP is back above target.
You can’t actually get out of control inflation simply by doing NGDP targeting. Reserve currency or not, sustained (above target) inflation occurs when the government spends more than it taxes and overrides central bank independence in order to monetize the debt.
The debt:GDP ratio is determined by the savings rate and productivity growth rate of the underlying economy. Unfortunately in the developed world, we’ve seen the savings rate grow and productivity growth stagnate due to a combination of wealth inequality and an aging population. These are both serious concerns, but raising interest rates and driving the economy into recession is definitely not going to help. Looking at the 2008 recession, the result was to drive down fertility and wage growth for the bottom 20% didn’t really happen until we reached near-full employment in 2019.
I think I was just misremembering here. However one way you could target NGDP (if you aren’t a reserve currency) is just to raise/lower your exchange rate target when you want to adjust NGDP. This solves the “pushing on a string” problem with low interest rates, since it is always possible to lower your exchange rate by selling domestic currency and buying the reserve currency.
Oops, you’re obviously right about not getting runaway inflation from NGDP targeting. Not sure if there’s still an issue there with printing when not a reserve currency, but maybe not.
Oops, I actually meant public_debt:GDP. I think growth there continues to be a concern, because it’s not “determined” in the way you said afaik, and e.g. COVID?
Ah, the FX idea is good! I still don’t actually understand some of the core of NGDP targeting—my reasoning runs into a contradiction because it seems like if you lower your FX, your nominal GDP should go up because your produced goods are now worth more of your own dollars, but that would mean that you’ve actually increased the amount of cash needed to make all the transactions go through the economy, such that you’ve created a cash bottleneck where there wasn’t one, which is the opposite of what is supposed to happen. Perhaps the lowering of your FX requires increasing the currency in circulation to a greater extent than the drop in its value, such that you end up with more currency x value at the end?
NGDP targeting theoretically doesn’t care one-way or the other about the amount of public debt (assuming an independent central bank). If the government spends too much money (due to a crisis like Covid), the interest rates it has to pay will rise and it will face a sovereign debt crisis. Two outcomes are possible: 1) the government declares bankruptcy, can no longer borrow on the public markets, and is forced to raise taxes or cut spending 2) the government mandates that the central bank buy public debt, monetizing the debt and producing above-target inflation. Case 2) (which is by far the more common one) is no longer NGDP targeting since the central bank ceases to independently follow its NGDP target.
I actually can’t think of a real-world example of case 1). When governments face a sovereign debt crisis and respond with austerity, NGDP generally falls well below trend. See, for example, Greece. I’m not sure why this is, but probably because austerity is forced on the country by an outside institution (usually the IMF or in Greece’s case the ECB) which cares more about getting its debts repaid than about making sure NGDP stays on-trend.
If the central bank sells FX and buys domestic currency, this will cause the value of you domestic currency to rise, meaning the price (in domestic dollars) of goods produced in your country will fall.
Obviously the central bank can only do this if it has FX reserves to sell. If not, then it has to raise interest rates, which should similarly cause the value of the domestic currency to rise (and nominal GDP to proportionately fall).