The Fed Framework Review: Macro Musings' Greatest NGDP Targeting Hits

Episode Summary

Executive Summary: This episode is a curated defense of nominal GDP targeting as a framework-review benchmark for the Fed, using archival clips from Fed officials, academics, and policymakers. It highlights NGDP targeting’s benefits for communication, supply-shock tolerance, financial stability, and macro stabilization, then ends with two ambitious extensions: cumulative NGDP level targeting and NGDP futures markets as policy guardrails.

Main Topics: Fed framework review and NGDP as a benchmark (Priority: 5/5): Beckworth frames the episode as part of Mercatus’s effort to influence the Fed’s 2024-25 framework review with policy briefs and historical clips supporting nominal GDP targeting. Core case for nominal GDP targeting (Priority: 5/5): Evan Koenig, George Selgin, Carola Binder, and Eric Sims argue that stabilizing nominal spending/income can improve macro outcomes relative to inflation-only frameworks. Communication and public intuition (Priority: 4/5): Several speakers argue NGDP targeting is easier to explain than it sounds because people care directly about nominal earnings, debt service, and predictable income streams. Supply-shock management and flexibility (Priority: 5/5): NGDP targeting is presented as a way to look through adverse supply shocks while also allowing prices to fall after positive productivity shocks, rather than treating all deflation as bad. Financial stability and debt-contract channel (Priority: 4/5): Bullard and Koenig describe how countercyclical inflation under NGDP targeting can make fixed nominal debt behave more like state-contingent equity, improving risk sharing. Bonus moonshots: cumulative NGDP targeting and futures contracts (Priority: 4/5): The episode closes with advanced proposals: making up for all past NGDP misses and using NGDP futures contracts/guardrails to discipline the Fed.

Key Arguments: Mary Daly says the Fed’s goals are unchanged across frameworks, but it should remain curious and willing to consider alternatives like NGDP targeting during reviews. Evan Koenig defines NGDP targeting as stabilizing the correlation between inflation and output so that prices and quantities move in opposite directions when shocks hit. Koenig argues a nominal consumption-spending target may be worth studying because monthly PCE data are available and some frictions may make consumption the more relevant nominal aggregate. George Selgin rejects the claim that NGDP targeting is too hard to explain, arguing that stable nominal income is the key to macro stability and that price-level movements under NGDP targeting reflect real scarcity conditions. Selgin also argues the Fed should see through all supply shocks, not just adverse ones, so productivity gains can translate into lower prices and broader consumer benefits. Jim Bullard’s financial-stability argument is that NGDP level targeting transforms non-state-contingent nominal debt into more state-contingent real debt, improving risk sharing across the cycle. Eric Sims says NGDP targeting performs well in New Keynesian model comparisons and is especially attractive when the output gap is uncertain and hard to observe. Carola Binder argues recent history strengthens the case for NGDP targeting because the Great Recession featured below-trend NGDP and a weak recovery, while the COVID rebound overshot trend and coincided with overheating. Charlie Evans says the Fed will likely discuss NGDP and similar indicators, but he prefers outcome-based policy over rigid instrument rules and wants the framework to better handle complex real-time shocks. Gotti Ergensen’s cumulative NGDP level target would require not just returning to target after misses, but making up for cumulative past deviations from the path. Scott Sumner’s NGDP futures proposal would let the Fed take long or short positions against market expectations, using market discipline as a warning system for policy errors.

Data Points: Fed framework review: 2024-25 - The episode is tied to the Federal Reserve’s formal framework review and Mercatus’s response. Past podcast guests cited: Mary Daly, Evan Koenig, Jim Bullard, Eric Sims, Carola Binder, George Selgin, Charlie Evans, Gotti Ergensen, Scott Sumner - Beckworth compiles clips from these prior conversations to inform the framework review. Mary Daly clip date: May 2024 - Live podcast recording with Mary Daly discussing whether NGDP targeting will be considered. George Selgin clip date: October 2022 - Selgin responds to Jerome Powell’s public skepticism about nominal income targeting. Great Recession: below pre-recession NGDP trend for a long time - Carola Binder uses this as evidence of an overly slow recovery under the existing approach. COVID recession: NGDP quickly returned to and then rose above trend - Binder uses this to illustrate overheating after the pandemic rebound. Targeted NGDP growth rate: 4% per year - Eric Sims mentions this as a transparent and easily communicated target path. NGDP futures guardrails: 3% to 5% - Scott Sumner describes a corridor in which the Fed would commit to take long/short positions. Specific contract point: 3% NGDP growth - Under Sumner’s example, the Fed would take a long position at 3% growth. Specific contract point: 5% NGDP growth - Under Sumner’s example, the Fed would take a short position at 5% growth. Vague historical reference: late 1980s / early 1990s - Koenig says his interest in NGDP targeting began when thinking about predictable income and a mortgage payment. Policy review publication: policy brief series - Mercatus is launching essays on the framework review to promote NGDP targeting as a benchmark.

Pivotal Quotes: "be curious, be confident, be humble" — Mary Daly: Daly describes the mindset she thinks should guide the Fed’s framework review. "the stability of nominal income is really the key to macroeconomic stability" — George Selgin: Selgin responds to Powell’s objection that NGDP targeting is too hard to explain. "if you undershot your level target, you sort of had to make up for it" — Gotti Ergensen: Ergensen explains cumulative NGDP level targeting as a make-up strategy for all past misses.

Implications: The episode argues NGDP targeting could improve Fed accountability, public communication, and shock management. Its bonus proposals push the debate toward stronger make-up rules and market-based discipline for future framework reform.