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Concept
Nominal income target
Summary
A nominal income target is a monetary policy target. Such targets are adopted by central banks to manage national economic activity. Nominal aggregates are not adjusted for inflation. Nominal income aggregates that can serve as targets include nominal gross domestic product (NGDP) and nominal gross domestic income (GDI). Central banks use a variety of techniques to hit their targets, including conventional tools such as interest rate targeting or open market operations, unconventional tools such as quantitative easing or interest rates on excess reserves and expectations management to hit its target. The concept of NGDP targeting was formally proposed by Neo-Keynesian economists James Meade in 1977 and James Tobin in 1980, although Austrian economist Friedrich Hayek argued in favor of the stabilization of nominal income as a monetary policy norm as early as 1931 and as late as 1975.
The concept was resuscitated and popularized in the wake of the 2008 financial crash by a group of economists (most notably Scott Sumner) who came to be known as the market monetarists. They claimed that the crisis would have been far less severe had central banks adopted some form of nominal income targeting.
The central bank establishes a target level or growth rate of nominal economic activity within a currency zone (usually a single country) for a given period without adjusting for price level changes (inflation/deflation). Policy is loosened or tightened as needed to hit the target. Since the goal is to hit the target for the coming period, some method of forecasting the default value of the target must be devised to serve as the baseline that indicates the direction and magnitude of policy change required to change the outcome to match that target.
One such mechanism is conventional economic forecasting. The central bank's forecast, that of some reified econometric model or an average of a group of forecasts prepared by independent groups are examples of such forecasts.
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