The Institute of Economic Affairs (IEA) has published a new paper, arguing that nominal GDP targeting is superior to inflation targeting.
Ahead of the Spring Statement, it suggested that the Government should reform the Bank of England’s mandate accordingly.
This research, authored by economist Damian Pudner, highlighted how NGDP targeting could provide a more stable and predictable macroeconomic environment by focusing on total nominal spending, rather than inflation alone.
Pudner argued that this revised approach to monetary policymaking would reduce volatility in output and employment, and help to support sustainable long-run economic growth.
The paper also suggested that nominal GDP targeting reduces policy uncertainty by minimising discretionary decision-making, improving transparency, and better anchoring expectations for businesses and financial markets.
David Beckworth, senior research fellow at the Mercatus Center at George Mason University, and former international economist at the US Department of the Treasury, said: “This paper by Damian Pudner makes a compelling case for shifting Britain’s monetary framework to nominal GDP targeting.
“Pudner lucidly demonstrates how NGDP targeting would provide greater economic stability, effectively managing both supply and demand shocks while preserving central bank credibility.
“It’s essential reading for policymakers reconsidering the future of monetary policy.”
Scott Sumner, former director of the program on monetary policy at the Mercatus Center at George Mason University, said: “Nominal GDP targeting is not a panacea, but it does provide for a stable macroeconomic environment that allows other policy reforms to be successful.
“This IEA paper does an excellent job of explaining the advantages from creating a stable path for nominal income in a world where both the labor market and the financial system rely on nominal contracts.”
Douglas McWilliams, economist and founder of Centre for Economics and Business Research (CEBR), said: “A number of economists (including me) have made the case for nominal GDP targeting over the years.
“Damian Pudner updates this research and makes a really persuasive case which the Treasury should take on board.”
