An unsophisticated observer might see this clear correlation:
and conclude that all that is needed to stop the Eurozone’s gradual economic descent relative to the U.S. is to boost its nominal GDP.
Then, he might begin to see to see some flaws in this logic. For example, other major countries that have had much faster NGDP growth than the U.S. over the past five years have not had much faster RGDP growth:
“Ah.”, but our observer might say, “Brazil may require a faster NGDP growth rate than the U.S. to get the same level of RGDP growth, but Brazil’s NGDP and RGDP growth rates relative to those of the United States are still highly correlated“.
“The correlation might not be as strong with Russia (especially during the 2004-2007 and 2013-14 periods), but it’s still pretty clear that even there a firm correlation generally exists between NGDP growth relative to the United States and RGDP growth relative to the United States”.
But, then, he might also notice that Japan seems to be a shining demonstration that NGDP growth far weaker than that in the U.S. need not lead to anywhere near similarly weak RGDP growth, and that in Q3 2014, Japan at last fell into the Russian and Brazilian pattern of having a higher year-over-year GDP deflator growth rate than the U.S., while having a year-over-year RGDP growth rate three percentage points lower than the U.S.:
And, at last, he may come across this extraordinarily clear case showing that higher NGDP growth is no cure-all for weak real GDP: the 1970s U.K.:
At last, our unsophisticated observer sees the light and comes to the correct conclusion: in our lifetimes, we’re always in the long run.
That is, though unusually weak NGDP growth might always result in unusually weak RGDP growth, the reverse is by no means always true. Or, an NGDP level target (even a 0% one, as seemed to have unofficially existed in Japan, 1999-2006 and 2009-2012) is an excellent thing in the short run, but an ever-higher-shifting GDP deflator target is not.