Should central banks adopt a nominal GDP target? | MacroBusiness

Leith van Onselen questions whether the RBA should target a flat growth rate of say 5% for nominal GDP rather than inflation:

I am not convinced that the RBA and RBNZ should necessarily set interest rates around nominal GDP. As shown in the below charts, setting interest rates in this manner would likely see the cash rate rise significantly from current levels which, given anaemic wages growth and high underemployment in both nations, would seem unwise:

Let’s look at the graph of GDP growth a bit closer. If we target 5% GDP growth:

  • From 2001 to 2007 rates were too low. That would have softened the sharp fall in 2008
  • Rates in 2008 were too high
  • Rates were not too low in 2009 to 2010 because of the growth undershoot in 2008
  • Rates were too high 2011 to 2016
  • Again, rates are not too low in 2017 because GDP has undershot its growth target for the last 6 years

I believe that targeting nominal GDP would help to stabilize growth with higher rates in the boom to prevent the need for lower rates in an ensuing bust.

Where I do agree with Leith is that banks need to re-focus from financing largely speculative (housing) assets to financing productive investment. In fact, not just the banks but the entire economy.

Source: Should central banks adopt a nominal GDP target? – MacroBusiness

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