Inflation is the wrong target and central banks should target nominal GDP trend growth Show more Show less
Targeting inflation is the wrong approach. An NGDP-targeting regime could also be more transparent and market-driven than the current interest-rate targeting regime. To further improve transparency, the Fed could engage in level targeting.
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Targeting interest rates only affects demand, not supply
Both NGDP targeting and inflation targeting respond to demand shocks by adjusting the money supply to offset any change in the velocity of money (the rate at which money passes from one holder to another). However, NGDP targeting also responds appropriately to a supply shock in any sector of the economy.
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