Home > Inflation, Monetary Policy > All that Matters is Nominal GDP, Gilt Market Edition

All that Matters is Nominal GDP, Gilt Market Edition

I should have put this in my previous post.  Martin Weale professed his concern for gilt yields:

But if we were to have faster inflation in the way you describe we would be hearing quite a lot from people on fixed incomes and we would probably also see the market drive up yields on government debt which could be something that would pose a burden for the taxpayer even if inflation did eventually come down.

Scott Sumner addressed this specific point in his post on Charles Goodhart:

[...] Goodhart is assuming debt markets care about inflation.  They don’t.  They care about NGDP growth.  As long as NGDP growth is around 4%, long term nominal rates will remain relatively low.  That’s the case regardless of whether the 4% NGDP growth is associated with o% RGDP growth and 4% inflation, 2% RGDP growth and 2% inflation, or 4% RGDP growth and 0% inflation.

The point about bond yields following NGDP not inflation seems reasonably clear in the data.  Here’s the chart for the UK:

UK Nominal GDP and Inflation vs Gilt Yields

UK Nominal GDP and Inflation vs Gilt Yields

 

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