The Spectacle Blog

Fed Considering Changing Its Strategy to Target NGDP

By on 10.27.11 | 3:52PM

According to the Financial Times, the Federal Reserve is considering, among other things, changing its strategy from focusing on an implicit inflation target to targeting a nominal gross domestic product (NGDP) level. 

In other words, instead of doing one-off programs like QE2 and Operation Twist to try to steer things in the direction of 2 percent inflation, the Fed announce that it would manipulate its balance sheet in whatever way it needed to to put the country on a path to hit a certain level of current spending. 

What makes it so remarkable that the Fed is even considering this change is that the idea more or less originated in the blogosphere, thanks to the work of one blogging economist, Scott Sumner of Bentley College, who maintains The Money Illusion. The Wall Street Journal's Kelly Evans has a good backgrounder on NGDP targeting, including great links. 

The best explainer of the pros and cons of NGDP targeting, however, was written by Sumner himself, and appeared in the fall issue of the great National Affairs.

Updated to fix misleading headline. 

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