Thatcher and NGDP targeting
Earlier this week former UK Prime Minister Margeret Thatcher died. There has been written a lot about her achievements (and failures), but I just came across this (HT Vaidas Urba) very interesting quote by her Chancellor of the Exchequer Nigel Lawson:
“In effect, the MTFS [Medium Term Financial Strategy] has set out a nominal framework designed gradually to reduce the growth of money GDP and improve the division of that growth between real output growth and inflation”"Money GDP" is of course what we also call nominal GDP. I think Lawson puts it very well. Monetary policy should deliver stable NGDP growth, while other policy - such as privatisations etc. - should increase productivity and hence "improve the division of that growth between real output growth and inflation". To me that is the optimal policy mix - the central bank delivers nominal stability and the government will implement economic reforms to boost real GDP. This obviously leaves no room for activist fiscal policies. As William Peden puts it (on Facebook):
"Lawson's point on macro/growth and micro/inflation is excellent. No noted economist believes that inflation should controlled by labour market policy, unemployment by fiscal policy, and investment by monetary policy. That was the Old Keynesian formula. Today, it's more like labour market policy for unemployment, fiscal policy for investment, and monetary policy for inflation.William, however, also rightly notes that the Thatcher government in the MTFS introduced a money supply target (something I have a lot sympathy for). That unfortunately didn't work as well as hoped. The key reason for the problems with the money supply target was that money-velocity became a lot more unstable than before as the Thatcher government at the same time pushed through substantial financial market reforms. Therefore, it seems pretty clear that if the Thatcher government instead had wanted to reduce "Money GDP growth" and then to stabilise it at a 4 or 5% growth path then it would likely have worked much better to announce that target directy rather than the money supply target.
Market Monetarism takes that notion to its logical conclusion: no fiscal policy in the pursuit of demand control, ever."