They could stand firm on an NGDP target or pass the mother of all stimulus bills.
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In her Times essay, Romer calls on the Federal Reserve to begin targeting nominal GDP (NGDP).
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Since the commencement of IOR, NGDP growth has become totally disconnected from the monetary growth.
FORBES: The Stunning Admission Of One Of Stimulus' Chief Architects
Beckworth and Ponnuru joined Romer in calling for the Fed to accelerate the growth of NGDP.
FORBES: The Stunning Admission Of One Of Stimulus' Chief Architects
However, even stranger than the performance of RGDP has been the path of nominal GDP (NGDP).
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Over the past 12 quarters, NGDP has grown at an annualized rate of only 2.38%.
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Annualized NGDP growth slowed sharply, falling from 5.78% in 3Q2012 to only 0.46% in 4Q2012.
This was the lowest quarterly NGDP growth rate since the recession ended in 2Q2009.
Whatever else it might do, NGDP targeting would not change the fundamental nature of the dollar.
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An NGDP growth rate of 5% for 17 calendar quarters would expand NGDP by 23.0%.
FORBES: Scott Sumner's NGDP Targeting Is Not The Answer To Our Monetary Woes
Since 3Q2008, the monetary base has increased by 182%, while NGDP has only risen by 9.5%.
By adjusting the growth rate of the monetary base, the Fed could raise and lower NGDP growth.
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During the four years from 4Q1996 to 4Q2000, NGDP grew at an average annual rate of 6.0%.
If you just go by the NGDP aggregate, you are really hurting your chances of keeping your job.
During the four years from 3Q2007 to 3Q2011, NGDP grew at an average annual rate of only 1.85%.
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That not coincidently is exactly when NGDP was falling the farthest and fastest.
M1 velocity (NGDP divided by M1) fell by 29.1% from 3Q2008 to 3Q2011.
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This, in turn, produces excessive growth of nominal GDP (NGDP), and accelerating inflation.
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Nominal GDP (NGDP) growing at only 3.3%, like it did during 2Q2012, or at 2.2%, the average since 3Q2008.
There would be no impact upon NGDP, and therefore no impact upon employment.
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And yet, the Fed has kept NGDP growing on a remarkably steady growth path (albeit, below its pre-crisis trend path).
Yet, we have reason to believe that changes in credit markets are an early warning sign for an NGDP heat-up.
Because if NGDP were growing at a stable rate then the log of NGDP would be a perfectly straight line.
However, assuming the NGDP path is permanently below its previous trajectory, the possibility for some tertiary dynamic to emerge remains.
The principle and interest agreed to where agreed to with the expectation that NGDP would continue along at its current pace.
Obviously, Romer would not advocate that the Fed boost NGDP unless she believed that it had the power to do so.
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Accordingly, she knows that the actions that the Fed could take to accelerate NGDP growth would not cost the taxpayer anything.
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During the 17 quarters from 3Q2008 to 3Q2012, the Fed expanded the monetary base by 203.2%, and NGDP rose by 9.4%.
FORBES: Scott Sumner's NGDP Targeting Is Not The Answer To Our Monetary Woes
Paul Volker tightened monetary policy, interest rates spike and NGDP subsequently fell.
The debt-to-GDP ratio responds to the 1981 NGDP in the normal way.
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