I have a question in regards to targeting GDP as discussed in the lecture on monetary policy. I am not quite clear on the reason why this policy is untenable. Is the reason because one cannot determine whether changes in GDP (in particular any deflationary changes) are coming from changes in the demand for money versus the production of more goods? Thank you, really enjoying the course so far.
The policy stems from an alleged asymmetry between price inflation or deflation set in motion by a change in the money side (i.e., the demand to hold money and the stock of money) and the goods side (i.e., the demand for and supply of goods), If the price inflation or deflation is caused by goods-side changes, then the market adjusts efficiently. If the price inflation or deflation is caused by money-side changes, then the market fails to adjust efficiently.
But there is no asymmetry. Each person ranks goods against money on his preference rank. If he initially ranks $500 above an iPad and then changes his ranking to iPad above $500, this is simultaneously an increase in demand for goods and a decrease in demand for money. If he increases his demand for money this is simultaneously a decrease in demand for goods.
This result is an implication of Ludwig von Mises’s famous integration of “micro” and “macro” economics that he accomplished in his book, The Theory of Money and Credit.