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Nominal GDP targeting rules: can they stabilize the economy?

  • Todd E. Clark

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.

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Article provided by Federal Reserve Bank of Kansas City in its journal Economic Review.

Volume (Year): (1994)
Issue (Month): Q III ()
Pages: 11-25

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Handle: RePEc:fip:fedker:y:1994:i:qiii:p:11-25:n:v.79no.3
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