Guest post: Measuring the stance of monetary policy through NGDP and Prices (by “Integral”)

Guest post: Measuring the stance of monetary policy through NGDP and Prices

by “Integral’

In this note I wish to show that the Federal Reserve has actually been quite successful in hitting its inflation target through this recession. I reinforce the need to use NGDP (relative to trend) as a proxy for the stance of monetary policy, not the price level (relative to trend).

Let us look at the Fed’s performance on inflation during the Great Moderation and Great Recession. I show here the log of the Consumer Price Index against its Great Moderation trend; the trend was estimated monthly from 1990:1 through 2006:12. It is clear that the price level has not strayed far from its trend:

One cannot make the argument for expanded monetary policy action based solely on the CPI. Indeed, I will go further: if the Fed’s only goal were to stabilize inflation at a 2.5% level target, then it would have unambiguously done a fine job throughout the crisis.

Using the PCE Price Index shows paints a similar picture; indeed by that metric the price level is slightly above its Great Moderation trend. Again I use 1990:1 through 2006:12 to estimate the trend.

Again the price-level evidence is that monetary policy has been appropriate through the crisis, or even too loose.

However, consider next the behavior of nominal GDP against its 1990-2006 trend:

Nominal GDP seems to be “stuck” on a permanently lower growth path relative to the Great Moderation. If we are to use the deviation of a variable from its trend as a proxy for the stance of monetary policy, the variable to use ought to be NGDP, not prices.

We have had an effective price level target throughout the crisis and received an anemic recovery; perhaps it is time to try an NGDP level target.

Leave a comment


  1. Yep. I did (actually Stephen Gordon did them for me) almost exactly the same graphs for Canada (which does explicitly target 2% inflation) and got hit between the eyes by exactly the same result.

    If someone looked at the CPI graph alone, and had no other information about the economy, he wouldn’t “see” anything to indicate there had been a recent recession. But if that same person looked at the NGDP graph instead, he would know that something big had happened.

  2. Bill Woolsey

     /  June 19, 2012

    Good post, but you should amend it to add the GDP deflator.

  1. Guest post: Why “Integral” is wrong about Price Level Targeting (by J. Pedersen) « The Market Monetarist

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