Scott Sumner Claims His Model is Wrong by Claiming His Model is Right

I wrote a blog post a couple of days ago wondering if nominal GDP targeting and inflation targeting are the exact same thing. I came away with two conclusions: if sticky consumer prices are the primary source of nominal rigidity, then the answer is yes and if sticky input prices and/or prices not included in the central bank's target price index are the primary source of nominal rigidity then the answer is no. Implicit in these two conclusions is that real GDP is always at potential under an inflation targeting regime in sticky-consumer-price models and that real GDP is not often at potential in sticky-input-price models.

So, where does Sumner fit in to this? Well, Sumner recently read this post on Canadian austerity in the 1990s by Stephen Williamson. He noticed that Williamson sees adherence to an inflation target as evidence against monetary offset, so he decided to write this wonderfully contradictory statement:

If you observe the inflation rate always being on target, then the central bank is successfully offsetting any fiscal action that would have otherwise moved AD and inflation.

Of course, this statement is perfectly sound a-cyclical inflation targeting results in a constant output gap of zero, but that's not the way that Scott Sumner sees the economy. Being a market monetarist, he believes that counter-cyclical inflation targeting is consistent with a constant output gap of zero. If an inflation target is optimal, then monetary offset did occur in Canada, but if a nominal GDP target is optimal, then monetary offset did not occur in Canada. Since even friction-less models suggest that the multiplier on government spending is greater than zero (pdf), it's pretty obvious that monetary offset did occur in Canada, but this basically discredits the already somewhat scarce theoretical evidence for market monetarism.

It seems that two of Sumner's strongest positions are not consistent with each other. Either monetary offset happens in an inflation targeting regime or nominal GDP targeting is optimal.