James Meade advanced the idea in his 1977 Nobel Prize lecture,2 and my MPC colleague, Martin Weale, spent much of the early part of his career working with Meade to develop the idea.3 Samuel Brittan, coming from a slightly different perspective, wrote an important IEA pamphlet in 1981, which argued that controlling nominal spending was what monetarists were really seeking to achieve. I even wrote my PhD thesis4 on the topic over thirty years ago. There is an important distinction between targeting the level or the growth of nominal income. The recent revival of academic interest in the issue relates to the scope for a target for the level of nominal income to provide additional traction for monetary policy when policy rates reach their zero lower bound. Some of the recent public commentary, however, has centred on the possible virtues of switching to a target for nominal income growth, so let me deal with that case first. In a normal environment, nominal income growth and inflation targets generate similar responses to aggregate demand shocks. But a nominal income target is more “forgiving” than a narrowly-defined inflation target in the case of cost shocks. An adverse cost shock simultaneously tends to raise the price level and reduce output. Stabilising nominal income requires a one-for-one trade-off in the response, whereas stabilising inflation, or the price level, requires that all the burden of the shock is transferred onto output. That is the basic case put forward for the superiority of a nominal income target over a strict inflation target.
But, given the stickiness of pay and prices, that would necessitate inefficient fluctuations in activity and employment. Now during the first decade of the MPC, such shocks were small and generally benign, with access to cheap manufactures from emerging economies providing steady downward pressure on prices. But the past few years have provided a less felicitous backdrop. Not only have we had to deal with the consequences of the financial crisis but we have also had to manage several major cost shocks. These include: a 25% fall in the sterling effective exchange rate; fluctuations in the price of oil between $ and $ a barrel; and movements down and up in VAT. Moreover, the impact of these changes has often proved hard to predict. For instance, we significantly underestimated the pass-through into inflation  1  See e.g. Bean et al. (2011). BIS central bankers’ speeches  1  of the exchange rate depreciation. So it should not be surprising that inflation has been both higher and more variable than during the Great Moderation. The question is: would outcomes have been materially better under an alternative framework, such as a nominal income target? The first thing to be said is that the idea of directing macroeconomic policy towards targeting nominal income is by no means new.