IEA Just Dropped a New Paper That Says NGDP Should Take Over Inflation Targeting
Just weeks before the spring statement lands, the Institute of Economic Affairs (IEA) has released a fresh report with a twist—nominal GDP (NGDP) targeting is the new gold standard for monetary policy, beating inflation targeting at every turn.
What It Feels Like to Switch from Inflation to NGDP
- Stitching the Whole Economy Together: Instead of chasing a single measly inflation rate, NGDP turns the focus onto the entire stream of spending. Think of it as looking at the whole train instead of just the engine.
- Less Whiplash, More Smooth Sailing: The paper argues that this big‑picture view reduces the up‑and‑down swings in output and jobs. As a result, the economy gets a steadier, long‑term growth rhythm.
- Less Guesswork, More Clear Expectations: By cutting out discretionary decision‑making, NGDP offers a crystal‑clear roadmap for businesses and markets, boosting confidence and transparency.
Three Must‑Do Recommendations
- Adopt an NGDP Target: The Bank of England should aim for a stable nominal GDP growth rate—this lets policy react smoothly to both demand and supply shocks.
- Speak Up: Clear, candid communication about why banks are moving to NGDP will shore up trust and keep uncertainty at bay.
- Launch a Futures Market: A nominal GDP futures market would let real‑time market signals guide policy, driving a more growth‑friendly environment.
History Motions: It’s Time to Update the Rulebook
Since the early 1990s, the Bank of England’s mandate has been pitched around runaway inflation. But reality’s a moving target. The IEA suggests that when the existing system stops hitting the mark, we should adapt, not just cling to the old playbook.
Support from the Big‑Names
-
Former Chancellor Sajid Javid once wrote: “Let’s shift the focus from inflation to nominal GDP for sustainable growth.”
-
David Beckworth, a senior researcher at the Mercatus Center, praised the IEA paper as “a compelling case for moving Britain’s monetary framework to NGDP”.
-
Scott Sumner added: “NGDP targeting provides a stable macro environment that makes other reforms possible.”
-
Douglas McWilliams noted: “Pudner’s update on NGDP gives the Treasury a strong case to take seriously.”
If the UK wants to keep its economy growing without the roller‑coaster of unpredictable swings, turning to NGDP is the bold, but sensible move. After all, you can’t regulate a train by looking only at one carriage.
