Goldman Sachs economist Jan Hatzius Advises Fed to switch to Nominal GDP Level Targeting

Joe Weisenthal  Oct. 15, 2011. Joe did a nice job of explaining concisely both NGDP Level Targeting and the Goldman Sachs bulletin:

In his latest US Economics Analyst note, Goldman’s Jan Hatzius offers up his suggestion for the next phase of Fed policy.

With short-term interest rates near zero and the economy still weak, we believe that the best way for Fed officials to ease policy significantly further would be to target a nominal GDP path such as the one shown in the chart on the right, indicating that they will use additional asset purchases to help bring actual nominal GDP back to trend over time. The case would strengthen further if deflation risks reappeared clearly on the radar screen.

More specifically:

The specific path in Exhibit 1 is calculated as the level of nominal GDP in 2007 extrapolated forward at a rate of 4½% per year. We can think of this number as the sum of real potential GDP growth of 2½% and inflation as measured by the GDP deflator of about 2%. The specific numbers matter less than the Fed’s willingness to a target path that is anchored at a point like 2007, when the economy was near full employment, and that they indicate that they will pursue this target aggressively.

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Ultimately, says Hatzius, a shift towards this kind of Fed policy could bring down unemployment much faster than the current path foresees.