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The Right Goal for Central Banks

by David Beckworth & Ramesh Ponnuru

When the target is nominal, results are phenomenal

A global economic crisis may be painful, but it can provide some useful lessons. Countries recovered from the Great Depression in the order that they exited the gold standard of the time, which is a major reason most economists no longer favor that monetary regime. The turmoil of the last few years has followed a pattern as well: The more a country’s central bank has done to keep nominal spending growing at a steady rate, the better that country has done. This international experience adds to an already-strong theoretical case for keeping nominal spending — the total amount of money spent in an economy — on a predictable path.

By definition, nominal spending is equal to nominal income (the total amount of money made) and to the size of the economy. The case for stabilizing the growth of that number starts with the understanding that central banks can’t fix everything that ails an economy and shouldn’t try. They cannot change its productivity or population growth, and therefore cannot change its long-term rate of economic growth. If regulations have made labor markets rigid, or rotten schools have yielded unskilled workforces, or property rights are insecure, central banks cannot overcome those problems.

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