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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, vol. 79(Q III), pages 11-25.
  • Handle: RePEc:fip:fedker:y:1994:i:qiii:p:11-25:n:v.79no.3
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    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. Roberto M. Billi, 2020. "Output Gaps and Robust Monetary Policy Rules," International Journal of Central Banking, International Journal of Central Banking, vol. 16(2), pages 125-152, March.
    3. Bilal Bagis, 2017. "Central Banking in the New Era," Eurasian Journal of Economics and Finance, Eurasian Publications, vol. 5(4), pages 197-225.
    4. Thornton, Saranna R., 1998. "Suitable policy instruments for monetary rules," Journal of Economics and Business, Elsevier, vol. 50(4), pages 379-397, July.
    5. Veetil, Vipin P. & Wagner, Richard E., 2018. "Nominal GDP stabilization: Chasing a mirage," The Quarterly Review of Economics and Finance, Elsevier, vol. 67(C), pages 227-236.
    6. Timonen, Jouni, 1995. "Nominal income as an intermediate target for monetary policy," Research Discussion Papers 21/1995, Bank of Finland.
    7. 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.
    8. 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.
    9. 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.
    10. 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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