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Instability under nominal GDP targeting: the role of expectations

  • Richard Dennis

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.

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Paper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2000-09.

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Date of creation: 2000
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Publication status: Published in The Economic Journal, vol. 111, pp. 103-113 (January 2001) : title Inflation expectations and the stability properties of nominal GDP targeting
Handle: RePEc:fip:fedfwp:2000-09
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