And a post post post script.
The case against NGDP targeting is actually even stronger theoretically than I let on in that post. I organised the last post around the simplest possible sticky price model, with no saving, capital, only one type of consumer, no sticky nominal wages, no credit frictions, a closed economy, so no trade…
If we relax these restrictions, optimal policy becomes a much more complicated beast. It involves [actually this is an informed conjecture not an assertion of analytical fact] a weighted sum of deviations of inflation, nominal wages, consumption by borrowers and lenders (entering separately), interest rate spreads, the capital stock, the real exchange rate… and with weights on inflation of prices and nominal wages an order of magnitude greater than the rest.
It would be reasonable to scoff at this and argue for nominal GDP targeting on grounds of simplicity. But then, as I said in the last post, on grounds of simplicity I’d argue for sticking with the status quo, with plenty of communication about how the central bank also cares about nominal wage growth, the real exchange rate, spreads and unemployment.