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On the desirability of nominal GDP targeting

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  • Garín, Julio
  • Lester, Robert
  • Sims, Eric

Abstract

This paper evaluates the welfare properties of nominal GDP targeting in the context of a New Keynesian model with both price and wage rigidity. In particular, we compare nominal GDP targeting to inflation and output gap targeting as well as to a conventional Taylor rule. These comparisons are made on the basis of welfare losses relative to a hypothetical equilibrium with flexible prices and wages. Output gap targeting is the most desirable of the rules under consideration, but nominal GDP targeting performs almost as well. Nominal GDP targeting is associated with smaller welfare losses than a Taylor rule and significantly outperforms inflation targeting. Relative to inflation targeting and a Taylor rule, nominal GDP targeting performs best conditional on supply shocks and when wages are sticky relative to prices. Nominal GDP targeting may outperform output gap targeting if the gap is observed with noise, and has more desirable properties related to equilibrium determinacy than does gap targeting.

Suggested Citation

  • Garín, Julio & Lester, Robert & Sims, Eric, 2016. "On the desirability of nominal GDP targeting," Journal of Economic Dynamics and Control, Elsevier, vol. 69(C), pages 21-44.
  • Handle: RePEc:eee:dyncon:v:69:y:2016:i:c:p:21-44
    DOI: 10.1016/j.jedc.2016.05.004
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    Cited by:

    1. repec:eee:jmacro:v:54:y:2017:i:pa:p:90-99 is not listed on IDEAS
    2. Craighead, William, 2016. "Hysteresis in a New Keynesian Model," MPRA Paper 70777, University Library of Munich, Germany.
    3. Benchimol, Jonathan & Bounader, Lahcen, 2018. "Optimal Monetary Policy Under Bounded Rationality," Globalization and Monetary Policy Institute Working Paper 336, Federal Reserve Bank of Dallas.
    4. Jonathan Benchimol & André Fourçans, 2016. "Nominal income versus Taylor-type rules in practice," Working Papers hal-01357870, HAL.
    5. repec:spr:jecfin:v:41:y:2017:i:2:d:10.1007_s12197-016-9357-7 is not listed on IDEAS
    6. Craighead, William, 2017. "Intermediate Goods and Exchange Rate Disconnect," MPRA Paper 83075, University Library of Munich, Germany.
    7. Benchimol, Jonathan & Fourçans, André, 2017. "Monetary Rule, Central Bank Loss and Household’s Welfare: an Empirical Investigation," Globalization and Monetary Policy Institute Working Paper 329, Federal Reserve Bank of Dallas.

    More about this item

    Keywords

    Optimal policy; Nominal targeting; Monetary policy;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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