David Eagle on “Nominal Income Targeting for a Speedier Economic Recovery”
I am continuing my mini-review of the research done by Dale Domian and David Eagle. The next paper in the “series” is a truly excellent paper on an empirical investigation of the impact of different monetary policy targets (inflation targeting, Price Level Targeting and Nominal Income Targeting) on the speed of recovery in the US economy. Here is the abstract of the paper “Nominal Income Targeting for a Speedier Economic Recovery”: “Using panelled time-series event studies of U.S. recessions since 1948, this paper studies the speed at which the unemployment rate recovers from a recession. This paper identifies recessions (such as the 1990s and 2001 recessions) as ones consistent with inflation targeting, whereas other recessions are more consistent with nominal-income targeting. We then find that the unemployment recovery time is significantly faster for those recessions consistent with nominal-income targeting than for those recessions consistent with inflation targeting. We then discuss the theoretical superiority of nominal income targeting from a Pareto-efficient micro foundations standpoint. Also, by studying the time path of nominal aggregate spending, we find definite empirical evidence of the “let bygones be bygones” property of inflation targeting.” The paper is extremely innovative in its method. The characteristics of the three types of targeting are used to identify what type of targeting the Federal Reserve (implicitly) has used during different recessions since World War II. It is then shown that in those recessions the Fed has targeted nominal income the recovery was speedier than in those periods when the Fed targeted inflation. The very innovative methods in my view clearly should inspire Market Monetarists to adopt these methods in future research to test and demonstrate the merits of Nominal Income Targeting. Furthermore, David Eagle demonstrates in a numbers of his papers that Nominal Income Targeting (NGDP targeting) is Pareto optimal. Hence, contrary to most Market Monetarists who focus on the macroeconomic advantages of NGDP Targeting Dr. Eagle demonstrates the microeconomic advantages and has a clear welfare perspective on NGDP Targeting. I think this is a tremendous strength in his (and Domian’s) research. Eagle’s and Domian’s research in many ways remind me of George Selgin’s argument for the so-called Productivity Norm. I certainly hope that Eagle and Domian will continue to pursue research in this area (and the related area of Quasi-Real Indexing) and I hope that the future will lead to exchange of ideas between Eagle and Domian and the Market Monetarists. Maybe one day they might even join the “club”.