Last time we noted the following regarding thinking about NGDP level targeting:
To understand what is going on we need to ask what expectations are being “set”, what is the “target” and how do these reflect what a central bank can “do”?
Expectations: We know they can be adaptive (backward looking) or rational (forward looking), but what do they refer to? Are people making choices based on expected prices, or are they making choices based on expected incomes? Do they view shocks as permanent or temporary?
Target: Is the goal to anchor the price level, or to anchor the level of expected nominal income growth? Is it to limit variability in prices and output?
What they do: If a central bank wants to increase prices can it, if it wants to increase nominal incomes can it? If they can do both, how does this influence their ability to “close output gaps”?
Here I want to discuss a little more about expectations.Read more