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Targeting Nominal Income Growth or Inflation?

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Author Info
Jensen, Henrik
Abstract

Within a simple New Keynesian model emphasizing forward-looking behaviour of private agents, I evaluate optimal nominal income growth targeting versus optimal inflation targeting. When the economy under consideration is mainly subject to shocks that do not involve monetary policy trade-offs for society, inflation targeting is preferable. Otherwise, nominal income growth targeting may be superior because it induces inertial interest rate behaviour that improves the inflation-output gap trade-off. Somewhat paradoxically, inflation targeting is relatively less favourable the more society cares for inflation, and the more persistent are the effects of inflation-generating shocks.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2341.

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Date of creation: Dec 1999
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Handle: RePEc:cpr:ceprdp:2341

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Related research
Keywords: Inflation Targeting Interest Rate Inertia Monetary Policy Nominal Income Growth Targeting

Find related papers by JEL classification:
E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

Cited by:
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  1. Bennett T. McCallum & Edward Nelson, 2000. "Timeless Perspectives vs. Discretionary Monetary Policy In Forward-Looking Models," NBER Working Papers 7915, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Christian Jensen & Bennett C. McCallum, 2002. "The Non-Optimality of Proposed Monetary Policy Rules Under Timeless-Perspective Commitment," NBER Working Papers 8882, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Richard Mash, 2002. "New Keynesian Microfundations Revisited: A Generalised Calvo-Taylor Model and the Desirability of Inflation vs. Price Level Targeting," Economics Series Working Papers 109, University of Oxford, Department of Economics. [Downloadable!]
    Other versions:
  4. Nessén, Marianne & Vestin, David, 2000. "Average Inflation Targeting," Working Paper Series 119, Sveriges Riksbank (Central Bank of Sweden). [Downloadable!]
    Other versions:
  5. Glenn D. Rudebusch, 2002. "Assessing Nominal Income Rules for Monetary Policy with Model and Data Uncertainty," Economic Journal, Royal Economic Society, vol. 112(479), pages 402-432, April. [Downloadable!] (restricted)
    Other versions:
  6. Bennett T. McCallum, 2000. "The Present and Future of Monetary Policy Rules," NBER Working Papers 7916, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  7. Michael Woodford, 2000. "Pitfalls of Forward-Looking Monetary Policy," American Economic Review, American Economic Association, vol. 90(2), pages 100-104, May. [Downloadable!] (restricted)
  8. Helmut Wagner, 2001. "Implications of Globalization for Monetary Policy," IMF Working Papers 01/184, International Monetary Fund. [Downloadable!]
  9. Richard Mash, 2002. "Monetary Policy with an Endogenous Capital Stock when Inflation is Persistent," Economics Series Working Papers 108, University of Oxford, Department of Economics. [Downloadable!]
    Other versions:
  10. Söderström, Ulf, 2001. "Targeting Inflation with a Prominent Role for Money," Working Paper Series 123, Sveriges Riksbank (Central Bank of Sweden). [Downloadable!]
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