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Targeting Nominal Income Growth or Inflation?

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  • 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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Keywords: Inflation Targeting; Interest Rate Inertia; Monetary Policy; Nominal Income Growth Targeting;

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