Is the Fed finally listening to Scott Sumner?

Brendan Greely writes of Scott Sumner.

Sumner who holds a Ph.D. from the University of Chicago, made a suggestion in the late 1980s to the New York Federal Reserve. He proposed that the Fed set a target for nominal GDP—real growth in GDP plus the rate of inflation. He felt that this would induce the correct level of business investment better than targeting either inflation or growth in real GDP by themselves. The response at the New York Fed, says Sumner, was, “Thanks, but no thanks.”

Targeting nominal GDP (NGDP) growth eliminates reliance on inexact measures of inflation which can mis-direct monetary policy. The advantage is that NGDP can be accurately measured. NGDP targeting would help to eliminate bubbles in the long term by restricting debt growth. And in the short-term would encourage the Fed to expand money supply in response to private sector deleveraging, avoiding deflationary pressure.

The announcement by the Fed’s rate-setting committee in mid-September doesn’t contain any mention of targeting nominal GDP. But its open-ended nature and clear goals—pump up the money supply until hiring rises strongly—resembles Sumner’s nominal GDP model, which would have a central bank do all in its power to achieve an agreed-upon nominal rate of growth.

It has taken Sumner almost 3 decades, but in the end he is likely to get there.

via The Blog That Got Bernanke to Go Big – Businessweek.