Nominal GDP targeting: what are central bankers talking about?

During the current crisis, the question of how central banks should set their monetary policies after the key policy rate has reached the zero lower bound has provoked heated debates. One idea that has recently received attention is ‘nominal GDP targeting’, which many people believe is worth considering as a monetary policy option irrespective of the crisis. This article presents an overview of the pros and cons of nominal GDP targeting. Overall, targeting a specific level of nominal GDP could, in principle, help monetary policy to stabilise the real economy more effectively after the interest rate has reached the zero lower bound, but practical problems (e.g. frequent revisions of GDP data, uncertainty related to the measurement of potential output, etc.) raise questions about its applicability. For this reason, using nominal GDP targeting as a general policy strategy would not provide tangible benefits compared with the proven, flexible inflation targeting regimes.