I was unclear why interest rates would be less likely to fall to zero with NGDP targeting. Yes, you would still have higher interest rates of say 2% if GDP is expected to grow that amount. However in a demand shock as GDP shrinks, the inflation rate would rise to compensate. But presumably the same amount of QE would be required? I do not see how that is different from the status quo.
The Angeletos paper somewhat dispelled these confusions. When there is a negative shock, firms will decrease production relative to their belief about the magnitude of the shock and the price level should increase as a function of the aggregate of those beliefs. NGDP targeting allows this to be the case more consistently than inflation targeting, which, I suppose is less sensitive to the state of the real economy. Am I close?
Thanks, these were great!
I was unclear why interest rates would be less likely to fall to zero with NGDP targeting. Yes, you would still have higher interest rates of say 2% if GDP is expected to grow that amount. However in a demand shock as GDP shrinks, the inflation rate would rise to compensate. But presumably the same amount of QE would be required? I do not see how that is different from the status quo.
The Angeletos paper somewhat dispelled these confusions. When there is a negative shock, firms will decrease production relative to their belief about the magnitude of the shock and the price level should increase as a function of the aggregate of those beliefs. NGDP targeting allows this to be the case more consistently than inflation targeting, which, I suppose is less sensitive to the state of the real economy. Am I close?