Target for nominal GDP growth A further proposal is that the central bank should have a target for growth in nominal GDP. Larry Summers, former United States Secretary of the Treasury and an active debater on many economic policy issues, is one of those who have advocated this. 30 Nominal GDP is a measure that reflects both price and volume. Growth in nominal GDP is in principle the same as the sum of the change in prices, in other words inflation, and the growth in output volume, that is, real GDP growth. 31 One advantage sometimes highlighted is that a nominal growth target “automatically” takes into account the real economy as monetary policy in this case puts as much emphasis on growth in the real economy as on inflation. When real GDP growth is low, the central bank conducts an expansionary policy to maintain the nominal growth target – and vice versa when growth is high. As I see it, however, this is not a decisive difference in relation to flexible inflation targeting, which normally takes into account the real economy in a way that stabilises economic activity. In a more long-term perspective, one can view a nominal growth target as meaning that the central bank has an implicit target for inflation, given the growth potential of the economy. For instance, a target for nominal GDP growth of 5 per cent and a growth potential of 3 per cent will implicitly entail an inflation target of 2 per cent.
Averting an economic anxiety attack calls for a balanced and flexible approach to the words and actions of businesses and policymakers. Planning for the worst is important, but needs to be accompanied by hope for the best. Encouraging news about the present needs not to be drowned out by fears for the future. Now is not the time for the economics of Chicken Licken.8 That means balance in how the economic outlook is described, acknowledging good news as well as bad, contemplating upside as well as downside scenarios, taking positive signals (as well as some comfort) from the resilience shown so far. This is not boosterism; it is balance, at a time when behavioural biases and pessimistic popular narratives offer an unbalanced lens on the economy. The policy authorities, including the Bank, have a public responsibility to avoid economic catastrophizing. Policymakers, including the MPC, have already demonstrated a willingness to act at speed and scale to mitigate economic risks. They have put in place the UK’s largest-ever economic insurance policy. It is important this insurance policy continues to flex as new risks arise, to build damaged confidence among households and businesses. For its part, the MPC has committed to keeping borrowing costs at current extraordinarily low levels to support jobs and incomes for as long as necessary to return inflation to target. 8  The fictional fowl who, having been hit on the head by an acorn, declared the sky was falling in.