In the last recent years, the idea of NGDP Targeting as a better, if not the optimal, target for central banks has received special attention. Surely the idea is not new, but the recent increase in interest is hard to deny. The idea is that the central bank should not target an interest rate, like the Fed Funds rate in the U.S. or the price level, but Nominal Gross Domestic Product (NGDP.) The idea is quite simple and straightforward. If there is monetary equilibrium, arguably what any central bank should aim to achieve, then nominal income (per capita) becomes stable.
The connection between monetary equilibrium and NGDP comes from the quantitative theory of money: MV = Py where M is money supply, V is money velocity or the inverse of money demand, P is the price level, and y is real GDP. If money is a good, it then follows that there is a demand and a supply.