Jan Hatzius And Sven Jari Stehn Of Goldman Sachs Call For NGDP Level Targeting And Monetary Stimulus

There’s no link since it’s a proprietary service for clients, but Jan Hatzius and Sven Jari Stehn have a new letter out for Goldman Sachs’ economics department in which they call for additional monetary stimulus and a switch to a policy of nominal gross domestic product level targeting:

Not a Panacea, But Probably the Best Option:

Under our forecast of high (and gradually rising) unemployment coupled with renewed disinflation, further monetary policy easing would be appropriate. We believe that a nominal GDP level target paired with additional large-scale asset purchases would be a good framework to deliver such easing. Asset purchases enhance the credibility of the shift in the target, and the shift in the target raises the likelihood that the asset purchases will be effective. The whole is greater than the sum of the parts. The case for such a policy would strengthen further if inflation fell sharply and the risk of deflation reappeared clearly on the radar screen.

The credibility of the policy could be strengthened further via a broadening of the assets to be purchased and/or renewed fiscal expansion. But these policies would probably require the explicit cooperation of Congress, which seems unlikely for the foreseeable future. Thus, we believe that the Fed’s most promising option for delivering significant further policy easing would be a shift to a nominal GDP level target coupled with large-scale asset purchases.


“NGDP level targeting” can sound very technical. But in ordinary language terms, what it means under the present circumstances is that the Fed should say “we would welcome a spurt of unemployment-reducing catch-up growth even if it means needing to tolerate a bit of inflation.” You hear a lot about the need to create more “confidence,” which is generally interpreted as a psychological notion. Be nice to businessmen and make them feel good about themselves. What matters more is expectations, and in particular the coordination of expectations. A firm statement from the central bank that they’re undertaking actions designed to spur catch-up growth and that they’re willing to tolerate a modest increase in inflation to get there alters expectations in a positive way no matter how CEOs feel about Barack Obama.