The story of a remarkably stable US NGDP trend

Today revised US GDP numbers for Q3 were released. While most commentators focused on the better than expected real GDP numbers I am on the other hand mostly impressed by just how stable the development in nominal GDP is. Just take a look at the graph below.

US NGDP 4 pct trend

I have earlier argued that the development in NGDP looks as if the Federal Reserve has had a 4% NGDP level target since Q3 2009. In fact at no time since 2009 has the actual level of NGDP diverged more than 1% from the 4% trend started in Q3 2009 and right now we are basically exactly on the 4% trend line. This is remarkable especially because the Fed never has made any official commitment to this target.

With market expectations fully aligned to with this trend and US unemployment probably quite close to the structural level of unemployment I see no reason why the Fed should not announce this – a 4% NGDP level target – as its official target.

PS I might join the hawks soon – if the trend in NGDP growth over the last couple of quarters continues in the coming quarter then we will move above the 4% NGDP trend and in that sense there is an argument for tighter monetary conditions.

PPS I am not arguing that monetary policy was appropriate back in 2009 or 2010. In fact I believe that monetary policy was far too tight, but after six years of real adjustments it is time to let bygones-be-bygones and I don’t think there would be anything to gain from a stepping up of monetary easing at the present time.

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    • Marcus, I am not sure what the alternative is. I prefer a rule rather than dicretionary “stimulus”.

      • Adam Platt

         /  December 1, 2014

        Lars, I think you’re overemphasizing the “rule” aspect relative to the importance of getting back to a reasonable trend line for Nominal GDP. A gold standard is a “rule”, but we would probably both agree that it would be much worse than the current inflation targeting. The important aspect isn’t that its a rule, it’s that the NGDP level is reasonable and predictable. Allowing the Fed to use mid-2009 as its baseline for a NGDP target would be a huge mistake, as the economy was already in a state of debt overhang and high unemployment at that point, and well-below its long-running NGDP growth rate. Using that as a baseline has simply locked in the debt-overhang/slow growth problem.

  1. Adam Platt

     /  November 26, 2014

    Incredible correlation there. I actually suspected that QE3 secretly WAS intended to be a Nominal GDP target, but I am surprised to see that it goes all the way back to 2009. I’m still shaking with rage at the notion that the Fed would start a nominal GDP target using a deflationary depression as it’s starting point. That perfectly explains the dismally slow recovery. It’s as if FDR took office in 1933 and instead of devaluing to reverse deflation, used 1932 (the depths of the depression) as his baseline to institute a nominal GDP target. Stupid stupid stupid.

    Better this than Europe though. And if the Fed really is finally attuned to Nominal GDP, at least (hopefully) they won’t let another 2008-2009 happen.

  2. W. Peden

     /  November 26, 2014


    Agreed. As the US starts to get back towards its LRAS position, the benefits of making up for the past AD shortfall gradually get outweighed by the probable costs of a big stimulus to get the US onto its earlier approx. 5% trend level.

    Economists should always have their eyes on the next war. A rule that avoids a future NGDP shock (be it negative or positive) is even more important than dealing with the 2008-2009 demand shock. In economic policy as much as anywhere else, it’s important to avoid the “sunk cost” fallacy.

  3. W. Peden

     /  November 26, 2014

    I don’t know enough about financial economics to make the argument carefully, but it is interesting how-

    (a) The US had a lot of big shocks to the financial system since 2010 e.g. Basel regulations.

    (b) The US hasn’t had a big financial crisis since 2010.

    (c) The US has had such a stable NGDP path since 2010.

    How many cases actually are there where there has been major financial instability (systemic bank failure loops, huge chunks of the financial system going very bankrupt etc.) AND there has been very stable NGDP? That correlation doesn’t establish causality one way or another, but as Scott Sumner so often says, you’d expect instability in NGDP to cause problems in the financial system. (And vice versa, under some circumstances.)

  4. America is the only country in the world where the government publishes potential GDP versus actual. This should be an IMF statistical mandate.

  5. Benjamin Cole

     /  November 30, 2014

    Given that large decreases in unemployment do not correlate to much of an increase in inflation, why not target 6% in NGDP growth?

    If 6% NGDP growth turns out to be mildly inflationary then 1) it could be scalef back or 2) we live with mild inflation to keep the economy running hot…

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