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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. There 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. The heterogeneity 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 and so leaves 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.
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Suggested Citation

  • James B. Bullard, 2020. "Optimal Monetary Policy for the Masses," Speech 88942, Federal Reserve Bank of St. Louis.
    • Handle: RePEc:fip:fedlps:88942
    Note: Presented at the Monetary Policy and Heterogeneity, Federal Reserve Board Virtual Conference.
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    File URL: https://www.stlouisfed.org/from-the-president/speeches-and-presentations/2020/optimal-monetary-policy-masses
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    Cited by:

    1. is not listed on IDEAS
    2. Benchimol, Jonathan, 2024. "Central bank objectives, monetary policy rules, and limited information," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 80, pages 1-37.
    3. Lars E.O. Svensson, 2020. "Monetary Policy Strategies for the Federal Reserve," International Journal of Central Banking, International Journal of Central Banking, vol. 16(1), pages 133-193, February.
    4. Pender, Casey, 2024. "Is deflation cause for panic? Evidence from the National Banking era," Journal of Macroeconomics, Elsevier, vol. 82(C).
    5. James B. Bullard, 2020. "How the World Achieved Partial Consensus on Monetary Policy," Speech 87939, Federal Reserve Bank of St. Louis.
    6. Ivan Jaccard, 2024. "Monetary Asymmetries Without (And With) Price Stickiness," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 65(2), pages 1003-1047, May.

    More about this item

    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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