Christina Romer Joins Team NGDP Level Targeting

Excellent article, she also brings the Depression-era historical examples:

For evidence that adopting the new target could help fix the economy, look at the 1930s. Though President Franklin D. Roosevelt didn’t talk in terms of targeting nominal G.D.P., he spoke of getting prices and incomes back to their pre-Depression levels. Academic studies suggest that this commitment played an important role in bringing about recovery.

President Roosevelt backed up his statements. He suspended the gold standard and let the dollar depreciate. He got Congress to pass New Deal spending legislation and had the Treasury monetize a large gold inflow. The result was an end to deflationary expectations, leading to the most impressive swing the country has ever seen from horrible contraction to rapid growth.

The experience of arming up for World War II offers powerful evidence in favor of the view that fiscal policy can help mobilize idle economic resources. But even though unemployment was still very high in 1938-39, it fell dramatically during the 1933-36 period thanks overwhelmingly to things that were done on the banking/monetary side. Fiscal policy during the early Roosevelt administration, somewhat like fiscal policy during the Obama years, largely served to offset ongoing fiscal contraction at the state and local levels. Today, additional aid to state and local governments to forestall the creation of new restructuring problems would be very welcome. But today, as in the 1930s, the monetary lever could be very powerful.