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Nominal GDP targeting rules: can they stabilize the economy?

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  • Todd E. Clark

Abstract

As the monetary aggregates have become less reliable guides for monetary policy, considerable interest has developed in identifying some other fundamental guide for policy. Many analysts argue that the best guide might be nominal gross domestic product (GDP). Some of these analysts also argue the Federal Reserve should target nominal GDP using one of several possible rules. Such a rule would specify how the Federal Reserve should adjust policy to affect a short-term interest rate in response to deviations of nominal GDP from target.> Clark examines the performance of nominal GDP targeting rules using statistical simulations of the economy. First, he reviews the argument that policymakers should target nominal GDP using a rule. Second, he describes some alternative targeting rules. Finally, he shows how these rules would perform based on simulation analysis of models of the U.S. economy. He concludes that policymakers cannot be certain that a simple nominal GDP targeting rule would improve economic performance.

Suggested Citation

  • Todd E. Clark, 1994. "Nominal GDP targeting rules: can they stabilize the economy?," Economic Review, Federal Reserve Bank of Kansas City, issue Q III, pages 11-25.
  • Handle: RePEc:fip:fedker:y:1994:i:qiii:p:11-25:n:v.79no.3
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    References listed on IDEAS

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    3. Hallman, Jeffrey J & Porter, Richard D & Small, David H, 1991. "Is the Price Level Tied to the M2 Monetary Aggregate in the Long Run?," American Economic Review, American Economic Association, vol. 81(4), pages 841-858, September.
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    5. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, January.
    6. Martin Feldstein & James H. Stock, 1994. "The Use of a Monetary Aggregate to Target Nominal GDP," NBER Chapters,in: Monetary Policy, pages 7-69 National Bureau of Economic Research, Inc.
    7. West, Kenneth D, 1986. "Targeting Nominal Income: A Note," Economic Journal, Royal Economic Society, vol. 96(384), pages 1077-1083, December.
    8. Bean, Charles R, 1983. "Targeting Nominal Income: An Appraisal," Economic Journal, Royal Economic Society, vol. 93(372), pages 806-819, December.
    9. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-491, June.
    10. William Poole, 1970. "Optimal Choice of Monetary Policy Instruments in a Simple Stochastic Macro Model," The Quarterly Journal of Economics, Oxford University Press, vol. 84(2), pages 197-216.
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    Cited by:

    1. Fair, Ray C. & Howrey, E. Philip, 1996. "Evaluating alternative monetary policy rules," Journal of Monetary Economics, Elsevier, vol. 38(2), pages 173-193, October.
    2. repec:ejn:ejefjr:v:5:y:2017:i:4:p:197-225 is not listed on IDEAS
    3. Thornton, Saranna R., 1998. "Suitable policy instruments for monetary rules," Journal of Economics and Business, Elsevier, vol. 50(4), pages 379-397, July.
    4. Timonen, Jouni, 1995. "Nominal income as an intermediate target for monetary policy," Research Discussion Papers 21/1995, Bank of Finland.
    5. Ray C. Fair, 2001. "Actual Federal Reserve policy behavior and interest rate rules," Economic Policy Review, Federal Reserve Bank of New York, issue Mar, pages 61-72.
    6. Ray Fair, 2003. "Optimal Control and Stochastic Simulation of Large Nonlinear Models with Rational Expectations," Computational Economics, Springer;Society for Computational Economics, vol. 21(3), pages 245-256, June.
    7. Thornton, Saranna Robinson, 2000. "How do broader monetary aggregates and divisia measures of money perform in McCallum's adaptive monetary rule?," Journal of Economics and Business, Elsevier, vol. 52(1-2), pages 181-204.
    8. Ray C. Fair, 2000. "Estimated, Calibrated, and Optimal Interest Rate Rules," Cowles Foundation Discussion Papers 1258, Cowles Foundation for Research in Economics, Yale University.

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    Keywords

    Gross domestic product;

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