What’s Wrong with Policy Targeting? PLENTY!!!

Many Mainstream economists are enamored of “targeting” certain macroeconomic variables. Among these are “inflation targeting” & “nominal GDP targeting” (See Scott Sumner @ The Money Illusion).

Implicit to their ardor for policy targets is that certain government agents or agencies should & can implement economic policies. That is, certain policy interventions are necessary & that they will have the desired effects.

Set aside for the moment that the individuals that are meant to hit these targets have ideological biases, human frailties & depend on incomplete/incorrect information. And ignore “public choice” issues.

Consider only that the analysis leading up to arguments involving policy interventions tend to overlook their microeconomic impacts. It is not that macroeconomists are ignorant of microeconomics; it is that they seem preternaturally incapable of considering the impact of their policy preferences on the decisions of households & firms.

Focusing on economic aggregates that are conceptually-imperfect & have numerous measurement flaws like GDP or CPI is a distraction from changes in relative prices. As it is, entrepreneurs are much more sensitive to changes in interest rates & movements in prices of their inputs than they are to reported macroeconomic data.

While conventional or unconventional (QE) monetary policy tools to inflate the money supply can boost nominal GDP or offset declining price levels, they tend to distort the production structure of the economy.

It turns out that a fixation on targeting leads macroeconomists to ignore the impact on capital spending whereby malinvestments as well as the emergence of asset or commodity bubbles.

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About christopher

Content of "Natural Order" attempts to reflect the commitment of Universidad Francisco Marroquin to support the development of a society of free individuals. The principal commentator for this blog is Christopher Lingle.

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