Nominal GDP Level Targeting

One of the reasons for the Canadian economy's lacklustre performance over the past decade may simply be that the Bank of Canada has been aiming at the wrong target. In this paper, Professor Steve Ambler of the Université du Québec à Montréal examines the pros - and some of the cons - for targeting the level of nominal GDP (NGDP) instead of the rate of inflation.

The current inflation-targeting regime is forward-looking. The Bank focuses on future inflation and does not seek to 'correct' past deviations of inflation from its target. This has proved to be a problematic stance over the past decade. Inflation has consistently come in below target, but since the Bank treats bygones as bygones, it has not responded to past undershooting by adopting a more aggressive policy stance.

If instead the Bank had targeted NGDP, it would have adopted an even more aggressive policy stance in order to bring about above-target inflation to offset the effects of the global financial crisis after it had passed. This extra monetary stimulus would also have the effect of making future recessions shorter and less severe than under inflation targeting.

"Nominal GDP level targeting has many potential advantages, and few potential costs"

Nicholas Rowe, noted economics blogger and former economics professor at Carleton University, agrees with Ambler's analysis. He centres his discussion on how the lags and leads in executing monetary policy lead to time consistency problems and on how the apparent flattening of the Phillips Curve may simply be an artefact of inflation targeting itself.