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Targeting Rules for Monetary Policy

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  • Joshua Aizenman
  • Jacob A. Frenkel

Abstract

This paper develops an analytical framework for the analysis of targeting rules for monetary policy. We derive the optimal money supply rule and analyze the implications of other monetary rules including rules that target nominal GNP, the price level, the monetary growth rate and the interestrate. An explicit welfare criterion is used in order to rank the alternative rules. In the model monetary policy is needed because labor market contracts set nominal wages in advance of the realization of the stochastic shocks. The principal result is that the welfare ranking of alternative targeting rules depends on whether the elasticity of labor demand exceeds or falls short of the elasticity of labor supply. Specifically, it is shown that if the demand for labor is more elastic than the supply, then targeting nominal GNP produces a smaller welfare loss than targeting the CPI which in turn produces a smaller welfare loss than interest rate targeting.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1881.

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Date of creation: Apr 1986
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Publication status: published as Aizenman, Joshua and Jacob A. Frenkele."Targeting Rules for Monetary Policy ," Economics Letters, Vol. 21, No. 2, (1986), pp. 183-187.
Handle: RePEc:nbr:nberwo:1881

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Cited by:
  1. Fang, Chung-rou & Lai, Ching-chong, 2002. "Targeting nominal income versus targeting price level: A target zone perspective," International Review of Economics & Finance, Elsevier, vol. 11(3), pages 229-249.
  2. Bennett T. McCallum, 1997. "Issues in the Design of Monetary Policy Rules," NBER Working Papers 6016, National Bureau of Economic Research, Inc.
  3. Dale W. Henderson & Warwick J. McKibbin, 1993. "A comparison of some basic monetary policy regimes for open economies: implications of different degrees of instrument adjustment and wage persistence," International Finance Discussion Papers 458, Board of Governors of the Federal Reserve System (U.S.).
  4. McCallum, B.T. & Nelson, E., 1998. "Nominal Income Targeting in an Open-Economy Optimizing Model," Papers 644, Stockholm - International Economic Studies.
  5. Lai, Ching-chong & Chen, Shu-hua & Shaw, Ming-fu, 2005. "Nominal income targeting versus money growth targeting in an endogenously growing economy," Economics Letters, Elsevier, vol. 86(3), pages 359-366, March.
  6. Lars E.O. Svensson, 2004. "Targeting Rules vs. Instrument Rules for Monetary Policy: What is Wrong with McCallum and Nelson?," NBER Working Papers 10747, National Bureau of Economic Research, Inc.
  7. Lars E.O. Svensson, 2005. "Targeting versus instrument rules for monetary policy: what is wrong with McCallum and Nelson?," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 613-626.

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