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Nominal Income Targeting

In: Monetary Policy

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  • Robert E. Hall
  • N. Gregory Mankiw

Abstract

This paper discusses nominal income targeting as a possible rule for the conduct of monetary policy. We begin by discussing why a rule for monetary policy may be desirable and the characteristics that a good rule should have. We emphasize, in particular, three types of nominal income targets, which differ in how they respond to past shocks, to prices, and real economic activity. A key question is how any of these rules might be implemented in practice. We suggest that the consensus forecast of future nominal income could playa role in ensuring that the central bank does not deviate from its announced target. To show how economic performance might have differed historically if the Fed had been committed to some type of nominal income target, we offer simulations of a simple model of the economy. According to the simulations, the primary benefit of nominal income targeting would have been reduced volatility in the price level and the inflation rate. Whether real economic activity would have been less volatile is unclear.

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This chapter was published in:

  • N. Gregory Mankiw, 1994. "Monetary Policy," NBER Books, National Bureau of Economic Research, Inc, number greg94-1, July.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 8329.

    Handle: RePEc:nbr:nberch:8329

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    References

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    1. Mccallum, Bennet T., 1988. "Robustness properties of a rule for monetary policy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 29(1), pages 173-203, January.
    2. Robert J. Barro & David B. Gordon, 1983. "A Positive Theory of Monetary Policy in a Natural-Rate Model," NBER Working Papers 0807, National Bureau of Economic Research, Inc.
    3. Gregory Mankiw, N. & Shapiro, Matthew D., 1986. "Do we reject too often? : Small sample properties of tests of rational expectations models," Economics Letters, Elsevier, vol. 20(2), pages 139-145.
    4. Kenneth D. West, 1986. "Targeting Nominal Income: A Note," NBER Working Papers 1835, National Bureau of Economic Research, Inc.
    5. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
    6. Asako, Kazumi & Wagner, Helmut, 1992. "Nominal Income Targeting versus Money Supply Targeting," Scottish Journal of Political Economy, Scottish Economic Society, vol. 39(2), pages 167-87, May.
    7. Laurence Ball & N. Gregory Mankiw & David Romer, 1988. "The New Keynsesian Economics and the Output-Inflation Trade-off," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 1-82.
    8. Taylor, John B., 1985. "What would nominal GNP targetting do to the business cycle?," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 22(1), pages 61-84, January.
    9. Meade, James E, 1993. "The Meaning of "Internal Balance."," American Economic Review, American Economic Association, vol. 83(6), pages 3-9, December.
    10. Bean, Charles R, 1983. "Targeting Nominal Income: An Appraisal," Economic Journal, Royal Economic Society, vol. 93(372), pages 806-19, December.
    11. James Tobin, 1980. "Stabilization Policy Ten Years After," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 11(1, Tenth ), pages 19-90.
    12. Robert J. Gordon, 1985. "The Conduct of Domestic Monetary Policy," NBER Working Papers 1221, National Bureau of Economic Research, Inc.
    13. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
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