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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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  1. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
  2. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834.
  3. George A. Kahn, 1994. "Achieving price stability: a 1993 report card," Economic Review, Federal Reserve Bank of Kansas City, issue Q I, pages 5-18.
  4. 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.
  5. 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.
  6. Kenneth D. West, 1986. "Targeting Nominal Income: A Note," NBER Working Papers 1835, National Bureau of Economic Research, Inc.
  7. William Poole, 1970. "Optimal choice of monetary policy instruments in a simple stochastic macro model," Staff Studies 57, Board of Governors of the Federal Reserve System (U.S.).
  8. 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.
  9. Bean, Charles R, 1983. "Targeting Nominal Income: An Appraisal," Economic Journal, Royal Economic Society, vol. 93(372), pages 806-19, December.
  10. 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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