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Nominal Income Targeting in an Open-Economy Optimizing Model

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  • Bennett T. McCallum
  • Edward Nelson

Abstract

This paper presents stochastic simulation results pertaining to the performance of nominal income targeting, here represented as a monetary policy rule that sets quarterly values of an interest rate instrument in response to deviations on existing studies of nominal income growth from a specified target rate. It attempts to improve on existing studies by conducting analysis in a macroeconomic model that is designed to respect both neoclassical theory and empirical regularities. Accordingly, the basic theoretical framework is one in which individual economic agents are depicted as solving dynamic optimization problems with rational expectations, but in an environment such that prices respond only gradually to changes in conditions. The adjustment specification used is the P-bar model, which satisfies the strict natural rate hypothesis. Two improvements over previous work by the authors are that consumption choices reflect habit formation, which lends some inertia to the system, while the modeled economy is open to international flows of goods and securities. Both of these features have major effects on the system's properties. Quantitatively, the model is calibrated to post-Bretton Woods U.S. quarterly data. The results suggest that nominal income targeting deserves serious consideration as a monetary policy strategy.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6675.

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Date of creation: Jun 2000
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Handle: RePEc:nbr:nberwo:6675

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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Friedman provided a theory for NGDP targeting
    by Lars Christensen in The Market Monetarist on 2011-11-06 08:18:19
  2. Nominal GDP Targeting Could Take the Place of Inflation Targeting
    by jfrankel in Jeff Frankels Weblog on 2012-06-13 22:10:10
  3. Jeff Frankel restates his support for NGDP targeting
    by Lars Christensen in The Market Monetarist on 2012-06-14 06:19:22
  4. "Inflation Targeting is Dead"
    by Mark Thoma in Economist's View on 2012-06-14 12:26:56
  5. Central Banks Can Phase in Nominal GDP Targets without Losing the Inflation Anchor
    by jfrankel in Jeff Frankels Weblog on 2012-12-26 02:59:14
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