Recently, in his familiar corner on The New York Times, Paul Krugman -Nobel laureate 2008-, in A Volcker Moment Indeed (Slightly Wonkish), shared the idea on adopting a nominal GDP (NGDP) targeting with Christina Romer (also in http://www.nytimes.com/2011/10/30/business/economy/ben-bernanke-needs-a-volcker-moment.html?_r=1).
It is not too much difficult to understand such a policy which aims to lead the economy out of the recession and create more jobs. However, I still have some thoughts with this recommendation:
1. First, whatever the policy instrument is, this policy will definitely put more pressure on inflation which has increased in the recent months and do not show any decreasing signal (See figure below). We all know that nominal GDP is known as current dollar GDP which is not adjusted for inflation. The higher the price level the higher the nominal GDP. Put in another, targeted nominal GDP can be obtained easily due to an increase in price. If this happens, nothing change in the economy in term of real things, say unemployment, real GDP.
Source: Third Quarter 2011 Survey of Professional Forecasters
2. Moreover, I think that nothing in terms of economics is important in the absolute value. What we often take into account is the relative value, say GDP growth rate compared to the previous year/quarter. Unfortunately, it was not shown in their suggestions. More importantly, if the inflation rate keeps climbing to a level being higher and larger than the nominal GDP growth rate, it will possibly sink the economy deeply. No one want to see such a scenario.
3. The last one is What policy instrument(s) should be chosen to achieve such a target? If it has yet specified, this policy should not be applied at this moment because there is a possibility that the policy is of the discretionary type which is not good for the current US economy situation as regarded by Taylor or stated by Allan Meltzer at http://www.aei.org/events/2011/11/16/the-fed-hero-villain-or-both/.
In my opinion, the best policy choice in the current is to follow a rule. It could be interest rate rule as suggested by Taylor or money supply rule of Milton Friedman.