March 21, 2014 / 3:49 PM / 5 years ago

Fed's Bullard says nominal GDP-targeting has challenges

WASHINGTON, March 21 (Reuters) - Using monetary policy to target a specific rate of economic growth poses challenges including the difficulty of knowing how fast the economy really should be growing, a top Federal Reserve official said on Friday.

In jargon-laden slides prepared for a discussion of a paper to be presented at the Brookings Institution in Washington on Friday, St. Louis Fed President James Bullard said the debate over so-called nominal GDP-targeting is far from settled, including what such a goal should mean for monetary policy.

Under one widely-used model, the policy implications are exactly opposite from those implied by the model proposed in the paper presented on Friday by London School of Economics professor Kevin Sheedy, Bullard said.

“We need to sharpen up this debate - NGDP-targeting cannot be all things to all people,” Bullard said.

One problem with Sheedy’s proposal, he said, is that it cannot work unless economists know how fast the economy can grow in the long run, a question that has been debated amid the slow growth of the U.S. economy after the 2007-2009 financial crisis.

Bullard’s slides shed little light on his own views on the usefulness of policy based on targeting nominal GDP, an approach that has been all but rejected by the core of policymakers at the Federal Reserve. The U.S. central bank has adopted a 2-percent inflation target but has no target for economic growth.

Bullard’s slides contained no insight on his view of the Fed’s decision on Wednesday to reduce its bond-buying stimulus for a third time since announcing the wind-down in December, and to jettison a set of guideposts it has used to help the public anticipate when it would finally raise interest rates. (Reporting by Jason Lange; Writing by Ann Saphir; Editing by Paul Simao)

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