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.
The market where the intervention takes place will then experience a “positive funding effect”, both because the interest rates on the market concerned become lower in relation to other commercial markets and because the issuers on the market in question have found a “safe” lender. This type of measure therefore requires a more detailed consideration and moreover knowledge of how different commercial markets function and are interlinked with other parts of the economy. Therefore, it is not so surprising that purchases of commercial securities have often been used just when there are serious problems on a particular market and when there is a risk that these problems will have negative effects on the economy as a whole. For example, the Federal Reserve purchased large amounts of mortgage bonds when this market threatened to cease functioning, which could have had serious consequences for credit supply to the household sector. Purchases of commercial paper are thus in principle a different type of measure than purchases of government paper. But they definitely comprise a possible tool to be used if the need arises, even for the Riksbank. Natural for fiscal policy to play a larger role All in all, the Riksbank will thus not be without means to counteract the next economic downturn. But it is hardly possible to claim that the opportunities are as good as they were, say, 15-20 years ago, when the neutral interest rate was still relatively high and there was plenty of scope to cut the repo rate.