Is Nominal GDP Targeting a Suitable Tool for ECB Monetary Policy?

15-09-2015

In the current monetary policy framework, the ECB (as most central banks) sets a target for the annual inflation rate as a nominal anchor to maintain price stability. The ECB inflation rate is defined as the year-on-year percentage change of the harmonised index of consumer prices. Nominal GDP rather than the consumer price index is sometimes advocated as a more effective policy tool for the conduct of monetary policy as nominal GDP changes, being the sum of nominal and real changes of overall economic activity, allows to directly target output fluctuations. In addition, nominal GDP is a less volatile aggregate than the consumer price index and the level of nominal GDP is the relevant indicator for assessing the sustainability of debt. The notes in this compilation discuss the relative strengths and weaknesses of inflation vis-a-vis nominal GDP targeting. The notes by key monetary experts have been requested by the Committee on Economic and Monetary Affairs (ECON) of the European Parliament as an input for the June 2015 session of the Monetary Dialogue between the Members of the ECON Committee and the President of the ECB.

In the current monetary policy framework, the ECB (as most central banks) sets a target for the annual inflation rate as a nominal anchor to maintain price stability. The ECB inflation rate is defined as the year-on-year percentage change of the harmonised index of consumer prices. Nominal GDP rather than the consumer price index is sometimes advocated as a more effective policy tool for the conduct of monetary policy as nominal GDP changes, being the sum of nominal and real changes of overall economic activity, allows to directly target output fluctuations. In addition, nominal GDP is a less volatile aggregate than the consumer price index and the level of nominal GDP is the relevant indicator for assessing the sustainability of debt. The notes in this compilation discuss the relative strengths and weaknesses of inflation vis-a-vis nominal GDP targeting. The notes by key monetary experts have been requested by the Committee on Economic and Monetary Affairs (ECON) of the European Parliament as an input for the June 2015 session of the Monetary Dialogue between the Members of the ECON Committee and the President of the ECB.

Ekstern forfatter

Andrew HUGHES HALLETT (School of Economics and Finance, University of St Andrews) ; Wolfgang LECHTHALER, Claire A. REICHER and Mewael F. TESFASELASSIE (Kiel Institute for the World Economy) ; Christophe BLOT and Jérôme CREEL, Xavier RAGOT (OFCE, Observatoire Français des Conjonctures Économiques)