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Optimal Monetary Policy for the Masses

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Abstract

We study nominal GDP targeting as optimal monetary policy in a simple and stylized model with a credit market friction. The macroeconomy we study has considerable income inequality, which gives rise to a large private sector credit market. This is an important credit market friction because households participating in the credit market use non-state-contingent nominal contracts (NSCNC). We extend previous results in this model by allowing for substantial intra-cohort heterogeneity, which is substantial enough that we can approach measured Gini coefficients for income, financial wealth, and consumption in the U.S. data. We show that nominal GDP targeting continues to characterize optimal monetary policy in this setting. Optimal monetary policy repairs the distortion caused by the credit market friction, thereby leaving heterogeneous households supplying their desired amount of labor, a type of “divine coincidence” result. We also further characterize monetary policy in terms of nominal interest rate adjustment.

Suggested Citation

  • James B. Bullard & Riccardo DiCecio, 2025. "Optimal Monetary Policy for the Masses," Review, Federal Reserve Bank of St. Louis, vol. 107(10), July.
    • Handle: RePEc:fip:fedlrv:101368
    DOI: 10.20955/r.2025.10
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    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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