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A New Way To Think About Monetary Policy

Here's an insightful chart from David Beckworth showing the boom in nominal spending (that is, not adjusted for inflation) around the world during the bubble years:

One school of macroeconomists thinks the key to economic stability isn't through controlling inflation and/or inflation expectations, but to keep nominal GDP growing at a steady rate, say somewhere between 4-6%, year in year out. Beckworth presents a slighly softer view:

In short, the world experienced a nominal spending boom over the years 2003-2007 that was unsustainable. Today, the excesses related to that boom are being worked out.

Now why bring up this perspective? Because I believe it has clear policy implications: policy makers should be watching nominal spending both at home and across the globe. Focusing too narrowly on inflation caused policymakers to miss this surge in nominal spending. Two institutions in particular should be watching global nominal spending. First, the IMF should be monitoring global nominal spending given its objectives for global financial stability. Second, the Federal Reserve should also be closely monitoring global nominal spending because (1) it is a monetary superpower and can currently shape to some degree global nominal spending and (2) it has also an enhanced mandate for financial stability. Stabilizing global nominal spending will not eliminate all financial risk, but it will go along way in preventing the buildup of economic imbalances.

-- Zubin Jelveh