Monday, April 13, 2009

Is There a Better Rule for Central Banks to Follow?

Those of us unenthused by super-empowered appellate courts under a system of judicial review are also bound to wonder about independent central banks.

We especially have to worry if they aren't going to just target some low, stable rate of inflation, but are going to have massive discretion to stop asset bubbles in their tracks and rebuild entire economies after they blow up. That's a lot of power, and I have no real reason (other than lack of professional competence to second guess them) to think they'll use it any more wisely than the Red Nine do.

Which is why I hope that Scott Sumner is right that targeting nominal GDP is a good idea. It seems like a simple rule. Instead of trying to hold inflation constant, you try to hold inflation plus growth constant. In the long run, you get the same amount of inflation. In the shorter run, you should be able to cut back on bubbles (in higher-than-normal growth) and recessions (in lower-than-normal growth).

Moreover, Sumner argues that the central bank could tap the market for forecasts about nominal GDP (the same trick could work for inflation).

If both tricks work, there'd be a discretion-less but depoliticized central bank.

If only we could do the same for the Red Nine.

Update: Much excitement about Austrian Business Cycle theory in the comments. Normally, I don't get into arguments with creationists, Spartacists or goldbugs -- I prefer rational discourse with yogic flyers and Mormons. John Quiggin has an interesting post on the original, not-so-crazy theory here.

Thursday, April 02, 2009