I have a new article up at National Review Online where I argue that the best way for Congress to narrow the Fed's mandate is through nominal GDP level targeting. One point mentioned in the piece is that because a nominal GDP target ignores aggregate supply shocks it dominates an inflation target. This applies equally well to a price level target. Another way of thinking about this is that movement in the price level is a symptom of all underlying shocks, whereas movement in nominal spending is an underlying shock itself (i.e. an aggregate demand shock). The Fed will be far more effective if responds directly to the underlying shock over which it has influence -- the aggregate demand shock -- than responding indirectly to an imprecise symptom of that shock.

The importance of nominal spending shocks can be seen in the three figures below. The first figure shows the