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Price Level vs. Nominal Income Targeting: Aggregate Demand Shocks and the Cost Channel of Monetary Policy Transmission

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Author Info
Malik, Hamza

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Abstract

This paper incorporates both the traditional aggregate demand-interest rate channel and the cost channel of monetary policy in a baseline ‘new Keynesian’ model and study two targeting regimes --- price-level targeting and nominal income targeting. In light of empirical considerations, alternative specifications for the aggregate demand and aggregate supply side of the economy also considered. The main result is that the cost channel matters: in case of a moderate policy response and with the cost channel operating the volatility of real output decreases under both price-level and nominal income targeting, while it increases in case of an aggressive policy response. The paper also finds that nominal income targeting performs better than price level targeting in bringing down the volatility of real output in almost all the specifications of the macro models used in the analysis.

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File URL: http://mpra.ub.uni-muenchen.de/456/
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 456.

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Date of creation: Mar 2005
Date of revision: Aug 2006
Handle: RePEc:pra:mprapa:456

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Related research
Keywords: the cost channel price level targeting nominal income targeting

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Find related papers by JEL classification:
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)

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  2. Lam, Jean-Paul & Scarth, William, 2002. "Monetary Policy and Built-In Stability," Review of International Economics, Blackwell Publishing, vol. 10(3), pages 469-82, August. [Downloadable!] (restricted)
  3. Bean, Charles R, 1983. "Targeting Nominal Income: An Appraisal," Economic Journal, Royal Economic Society, vol. 93(372), pages 806-19, December. [Downloadable!] (restricted)
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  6. Robert Dittmar & William T. Gavin & Finn Kydland, 1999. "The inflation-output variability tradeoff and price-level targets," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 23-32. [Downloadable!]
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  12. Gali, Jordi & Gertler, Mark, 1999. "Inflation dynamics: A structural econometric analysis," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 195-222, October. [Downloadable!] (restricted)
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  13. Dennis, Richard, 2001. "Inflation Expectations and the Stability Properties of Nominal GDP Targeting," Economic Journal, Royal Economic Society, vol. 111(468), pages 103-13, January. [Downloadable!] (restricted)
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  18. 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)
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  19. Ravenna, Federico & Walsh, Carl E., 2006. "Optimal monetary policy with the cost channel," Journal of Monetary Economics, Elsevier, vol. 53(2), pages 199-216, March. [Downloadable!] (restricted)
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  25. Robert E. Hall & N. Gregory Mankiw, 1994. "Nominal Income Targeting," NBER Working Papers 4439, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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