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Targeting Nominal Income Growth or Inflation?

  • Henrik Jensen

Within a simple New Keynesian model emphasizing forward-looking behavior of private agents, I evaluate optimal nominal income growth targeting versus optimal inflation targeting. When the economy 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 policy making, which improves the inflation-output-gap trade-off. Somewhat paradoxically, inflation targeting may be relatively less favorable the more society dislikes inflation, and the more persistent are the effects of inflation-generating shocks. (JEL E42, E52, F58)

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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 92 (2002)
Issue (Month): 4 (September)
Pages: 928-956

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Handle: RePEc:aea:aecrev:v:92:y:2002:i:4:p:928-956
Note: DOI: 10.1257/00028280260344533
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