Michael Woodford Endorses Monetary Policy that Targets the Level of Nominal GDP
When I want to better understand the principles of optimal monetary policy, Mike Woodford is the one I turn to. Someday I hope to finish reading his book Interest and Prices and many of his key academic journal articles. If I do, I am sure that then I will have many nuances to argue over with Mike (including the effects of departures from Wallace neutrality on optimal monetary policy)–and despite my relative ignorance in this area, I did manage a Powerpoint discussion of one of Mike’s papers with one of his coauthors, Vasco Curdia, at a Bank of Japan Conference. But until the fabled day when I can really dig into optimal monetary policy, Mike is my authority on many of the fundamental principles of how to conduct monetary policy. And I am not alone in my esteem for Mike.
So it is big news that Mike has come out in favor of nominal GDP targeting. I know this thanks to Lars Christensen, who in addition to these two recent posts about Mike
has an excellent recent post arguing that the European debt crisis is due to overly tight monetary policy.
Mike notes, as I would, that there are nuances of optimal monetary policy that a simple nominal GDP targeting rule does not capture. But the simplicity, robustness, transparency and rough-and-ready approach toward optimality of such a rule makes it a key step in improving monetary policy from the implicit rule being followed now.