WP: NGDP Targeting: Is 5 Percent Too Much

This is the title of my latest draft (of which I very much welcome comments) about Market Monetarist’s NGDP Targeting.

Since I don’t want the title to send the wrong impression, I want to clarify is that I don’t question the NGDP Targeting principle. The topic of the paper is whether or not there are signs that a 5% growth of NGDP before the subprime crisis wasn’t in fact too much.

There is some tension. On one side Taylor Rule and the productivity norm suggest that monetary policy was too loose during the ca 2002-2007 period. But Market Monetarism does not support this reading. The problem was the fall of NGDP in 2008, not that NGDP was growing to fast. This also requires to deal with the question of how a housing bubble took place without an excess of money supply.

I look at three things that point to a potential reading that 5% growth of NGDP might been too much. The first one is NGDP deviations from trend. Deviations occurs before and after the subprime crisis. Though the first deviation takes place during a few years, the second deviation is a sudden fall in NGDP (this is why the first deviation is not observable by direct visual inspection.) Both deviations, however, are of similar magnitude.

The second one is the behavior of intermediate prices with respect to final prices. If intermediate prices rise while final prices remain constant then it is possible that the fall in final prices because of productivity gains is being offset by monetary expansion (implicit inflation.)

The third one is to observe trend deviations of GO (Gross Output) which more closely tracks all transactions in the economy. Monetary equilibrium depends on all transactions, not only final ones. This yields a similar reading to that of NGDP trend deviations but with a larger magnitude.


I study the 5% NGDP Targeting rule for the period between the dot-com and subprime crises in the United States. If there is monetary equilibrium with NGDP growing at 5%, then other indices, such as price indices, should also present a defined behavior. I find that deviations from this trend by nominal income variables and the behavior of other economic variables suggest that the NGDP growing at 5% may have resulted in excess money supply. Although this observation does not question the principle behind NGDP Targeting, it suggests that the target should be carefully chosen. This result is also consistent with the interpretation that monetary policy was too loose for too long from 2002 to 2007 following other indicators such as the Taylor Rule.

Download from SSRN.