By John Carney, Senior Editor, CNBC.com
NEW YORK ( CNBC) -- Should the Federal Reserve abandon its traditional tactic of targeting interest rates in favor of targeting a specific level of nominal gross domestic product (NGDP)? This idea -- known as NGDP targeting -- has recently emerged as one of the hottest topics in economics. Bentley University economist Scott Sumner deserves a lot of the credit for popularizing the concept that has recently been endorsed by Goldman Sachs economists Jan Hatzius and Sven Jari Stehn, Paul Krugman and many others. The basics are rather straightforward. Instead of targeting levels for the Fed Funds rate -- which is how the Fed has conducted its monetary policy for some time -- the Fed would target the non-inflation adjusted -- or "nominal"-- growth of the economy. This entails a couple of things. For one, the Fed would be saying that it would tolerate much higher levels of inflation than people currently expect. Right now it is assumed that the Fed has an implicit inflation target of around 2%. NGDP targeting would mean that the Fed would pretty much ignore how high inflation rises so long as growth rises less than its stated goal.
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