OPEN-ECONOMY MARKET: Existing Arguments for NIT 3

A frequently expressed objection to NIT is that national income statistics are not produced often enough or quickly enough — and are often significantly revised after their first release. It can be argued, however, that the essence of the strategy is to use some reasonably comprehensive measure of aggregate nominal spending; it does not have to be GDP or GNPperse. Thus, other measures could readily be developed on the basis of price and quantity index measures that are reported more often and more promptly.

It might even be possible to devise a monthly measure that is conceptually more attractive than GDP, by making the price index more closely tailored to public perceptions of inflation and using a quantity index that treats government purchases more appropriately. But in any event, if policy-instrument adjustments are based on expected future target discrepancies, rather than past misses, then this issue is not directly relevant.

Quite recently a novel and rather extreme argument against NIT has been put forth by Ball (1997) and seconded by Svensson (1997a). This argument is that successful stabilization of the growth rate (or the growing level) of nominal income would result in non-stationarity of the output and inflation components considered separately — an outcome that Ball (1997) labels “disastrous.”

This result is shown to hold, however, only in a particular theoretical model, with no attempt being made to consider its robustness or fragility. The model in question is, moreover, a non-optimizing model of an entirely backward-looking type, with no expectational terms included in either of its behavioral equations. (These are an IS function and a price-adjustment or Phillips-curve relation.) The nature of the demand portion of the model — i.e., the IS function — turns out to be unimportant for the non-stationarity result in question, but McCallum (1997c) shows that the price-adjustment specification is crucial. In particular, replacement of the Ball-Svensson price-adjustment relation with any of seven other popular specifications eliminates the non-stationarity result Also see Dennis (1998). payday loans no credit checks

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