Cecchetti & Schoenholtz
Monetary policy target regimes: inflation, price level, nominal GDP, etc.: Should central banks target inflation, the price level or nominal GDP? The question of the appropriate policy target has been a subject of analysis at least since the 1980s and has become a matter of intense debate (see here and here) for the past several years. Many proponents of price-level or nominal GDP targeting share the idea that – by credibly committing to make up the shortfalls in the price level or in nominal GDP relative to the pre-crisis trend – policymakers could drive down the current real interest rate and accelerate the economic recovery.
Looking at where we are today, what would this mean? ...
The bottom line:
All of this leads us to conclude that returning to the price path implied by the pre-crisis trend is a realistic possibility. Returning to the earlier nominal GDP path is not. That said, the inflation overshoot that our rough calculations suggest is moderate, so the benefits are likely to be limited. But the costs could include a loss of credibility in the inflation-targeting framework. Would that really be worth it?