Forex Flash: BoE to target nominal GDP levels? – Goldman Sachs

Mark Carney, who will replace Mervyn King as BoE Governor in July, recently argued that central banks should make greater use of explicit forward guidance in “extraordinary” times, including, if necessary, changing their remits to target the level of NGDP (nominal GDP) rather than the inflation rate.

“In principle, the adoption of an NGDP level target could help to circumvent central banks’ zero-bound problem by raising inflation expectations and, therefore, lowering expected real interest rates for a given level of nominal rates.” notes the Economics Research Team at Goldman Sachs.

More generally, if the NGDP level target is credible, the anticipation of returning to that level should shape expectations in a manner that helps to self-equilibrate the economy in booms as well as troughs. NGDP targeting also implies a greater willingness on the part of policymakers to accommodate short-run supply shocks, while stabilizing nominal demand.