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Instability under nominal GDP targeting: the role of expectations

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  • Richard Dennis

Abstract

Ball (1997) shows using a small closed economy model that nominal GDP targeting can lead to instability. This paper extends Ball's model to uncover the role inflation expectations play in generating this instability. By changing the process by which inflation expectations are formed in the short-run aggregate supply curve we show that nominal GDP targeting in either level or growth form does not generally result in instability. We further show that in Ball's (1997) case where exact targeting causes instability that moving to inexact targeting restores stability.

Suggested Citation

  • Richard Dennis, 2000. "Instability under nominal GDP targeting: the role of expectations," Working Paper Series 2000-09, Federal Reserve Bank of San Francisco.
  • Handle: RePEc:fip:fedfwp:2000-09
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    Cited by:

    1. Rudebusch, Glenn D. & Svensson, Lars E. O., 2002. "Eurosystem monetary targeting: Lessons from U.S. data," European Economic Review, Elsevier, vol. 46(3), pages 417-442, March.
    2. Svensson, Lars E. O., 1999. "Inflation targeting as a monetary policy rule," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 607-654, June.
    3. McCallum, Bennett T. & Nelson, Edward, 1999. "Nominal income targeting in an open-economy optimizing model," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 553-578, June.

    More about this item

    Keywords

    Gross domestic product ; Inflation (Finance) ; Rational expectations (Economic theory);

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies

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