Back in November 2011, there was a part of the world that I didn't understand. The politics of monetary policy didn't make sense to me. Now the world is starting to make more sense. It's not that my understanding has changed. It's the world that has begun to change.
Specifically, John Quiggin has come out in favour (HT Marcus Nunes) of Nominal Gross Domestic Product Level Path Targeting. And John Quiggin is a lefty. That helps resolve my puzzle back in November 2011. I didn't understand: "Why isn't NGDP targeting a lefty thing?". Now that NGDPLPT is becoming a lefty thing, the world is starting to make sense to me again. I think it's only a matter of time before Canadian lefties join this Australian lefty. (We don't pay enough attention to Australia, because it's so far away, but Australia is just like Canada except it's hotter and nobody speaks French.)
It's in the Marketing Department that I think John Quiggin needs some help:
"The abandonment of inflation targeting would, of course, be an admission of failure. But central banks have failed, disastrously, and admitting this would be the first step towards a sustainable recovery."
Oh dear. That's not the best way to sell the policy to the Bank of Canada. Nor is it totally fair. Because:
1. Inflation targeting (in Canada and elsewhere) has always in practice been flexible inflation targeting. The Bank of Canada does not try to bring inflation immediately to the 2% target under all circumstances. It brings inflation slowly back to target if it deviates, precisely because it knows that bringing it back too quickly would cause undesirable fluctuations in real output and employment. And it focuses on core inflation as an "operational guide" to help it "see through" one-time shocks like oil prices and indirect taxes. NGDPLPT would help make the "flexible" bit of flexible inflation targeting more transparent.
2. Inflation targeting was designed to provide a "nominal anchor". But as is well known, it's an anchor that can drift over time unless the Bank of Canada gets it exactly right and hits the 2% target exactly every single year. Switching from an inflation target to a Price Level Path target makes the real value of long-term nominal contracts more predictable. An NGDPLP target has the added bonus of ensuring that debtor and creditor share the risks of uncertainty about real growth (if bad things happen to long run real growth, creditors would bear some of the pain too).
Try this instead:
'We are not abandoning inflation targeting; we are refining inflation targeting to provide greater transparency and a better long-term nominal anchor. Inflation targeting has not failed; but there is room for improvement in implementing the same underlying vision.'
Doesn't that sound better?
And have a second look at this graph Stephen did for me: