The Bank of England’s Governor-elect has argued for a switch to a nominal GDP target. This column points out problems with nominal GDP targets, especially in levels. Among other issues, nominal GDP targeting means that uncertainty surrounding future real growth rates compounds uncertainty on future inflation rates. Thus the switch is likely to raise uncertainty about future inflation and weaken the anchoring of inflation expectations.

The time is right for the world’s central banks to rethink how they conduct monetary policy. This column argues that central banks should follow the lead of Mark Carney, the Bank of England’s new Governor, in considering a move to nominal GDP targeting. If nominal GDP targeting is introduced in two distinct phases, its introduction can deliver the advantage of some stimulus now – when it is needed – while satisfying central bankers’ reluctance to abandon their cherished low inflation target.

The current economic crisis has called into question the role of monetary policy, particularly inflation targeting and its oversight of asset bubbles and supply side shocks. This column is an obituary to inflation targeting and call for nominal GDP targeting to replace it.