The case for nominal GDP level targeting

Joshua Hendrickson

Southern Economic Journal, 2025, vol. 91, issue 4, 1404-1419

Abstract: In this paper, I make the case for a nominal GDP level target in the United States. I begin by arguing that the Federal Reserve's current flexible average inflation targeting regime is deficient. I then argue that since a competitive monetary equilibrium is optimal, monetary policy should seek to replicate the competitive monetary model. Doing so resembles nominal GDP targeting. I also offer the following practical reasons why policymakers might prefer a nominal GDP target. Nominal GDP targeting (a) does not require policymakers to determine whether current economic fluctuations are demand‐driven or supply‐driven nor does it require real‐time estimates of the output gap, (b) automatically prevents the central bank from exacerbating supply shocks, and (c) leads to greater financial stability. Finally, I make the case for targeting the level, rather than the growth rate, of nominal GDP. Doing so prevents the path of nominal GDP from deviating arbitrarily far from its intended growth path, which anchors expectations and aids in long‐run economic decision‐making.

Date: 2025
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https://doi.org/10.1002/soej.12729

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Persistent link: https://EconPapers.repec.org/RePEc:wly:soecon:v:91:y:2025:i:4:p:1404-1419

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