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Nominal Income Targeting in an Open-Economy Optimizing Model

  • McCallum, B.T.
  • Nelson, E.

The purpose of this paper is to examine the merits of monetary policy rules that utilize as their principal target variable the level or growth rate of some aggregate reasure of nominal spending, such as nominal GDP, rather than a monetary aggregate or an index of inflation (either alone or in combination with some measure of the output gap). Because there is a large and rich literature on nominal income targeting, (briefly, NIT), we begin in Section 2 with a short review of existing arguments in its favor. Then in Section # we present some evidence which suggests that NIT is in effect utilized in practice in the United States.

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Paper provided by Stockholm - International Economic Studies in its series Papers with number 644.

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Date of creation: 1998
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Handle: RePEc:fth:stocin:644
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  1. Stephen G. Cecchetti, 1995. "Inflation Indicators and Inflation Policy," NBER Working Papers 5161, National Bureau of Economic Research, Inc.
  2. Svensson, Lars E.O., 1997. "Inflation Targeting: Some Extensions," Seminar Papers 625, Stockholm University, Institute for International Economic Studies.
  3. Dale W. Henderson & Warwick J. McKibbin, 1993. "A comparison of some basic monetary policy regimes for open economies: implications of different degrees of instrument adjustment and wage persistence," International Finance Discussion Papers 458, Board of Governors of the Federal Reserve System (U.S.).
  4. Bennett T. McCallum, 1993. "Specification and Analysis of a Monetary Policy Rule for Japan," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 11(2), pages 1-45, December.
  5. Rudebusch, Glenn D & Svensson, Lars E O, 1998. "Policy Rules for Inflation Targeting," CEPR Discussion Papers 1999, C.E.P.R. Discussion Papers.
  6. Robert E. Hall & N. Gregory Mankiw, 1993. "Nominal Income Targeting," NBER Working Papers 4439, National Bureau of Economic Research, Inc.
  7. Milton Friedman, 1971. "Some Dynamic Implications of the Monetary Theory of Nominal Income," NBER Chapters, in: A Theoretical Framework for Monetary Analysis, pages 40-43 National Bureau of Economic Research, Inc.
  8. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
  9. Bennett T. McCallum & Edward Nelson, 1999. "Performance of Operational Policy Rules in an Estimated Semiclassical Structural Model," NBER Chapters, in: Monetary Policy Rules, pages 15-56 National Bureau of Economic Research, Inc.
  10. Ratti, Ronald A, 1997. "The Stabilizing Properties of a Nominal GNP Rule: A Comment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(2), pages 263-69, May.
  11. Jeff Fuhrer & George Moore, 1993. "Inflation persistence," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
  12. Lars E. O. Svensson, 1996. "Price Level Targeting vs. Inflation Targeting: A Free Lunch?," NBER Working Papers 5719, National Bureau of Economic Research, Inc.
  13. Bennett T. McCallum, 1998. "Solutions to Linear Rational Expectations Models: A Compact Exposition," NBER Technical Working Papers 0232, National Bureau of Economic Research, Inc.
  14. Julio J. Rotemberg & Michael Woodford, 1999. "Interest Rate Rules in an Estimated Sticky Price Model," NBER Chapters, in: Monetary Policy Rules, pages 57-126 National Bureau of Economic Research, Inc.
  15. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  16. Milton Friedman, 1971. "Correspondence of the Monetary Theory of Nominal Income with Experience," NBER Chapters, in: A Theoretical Framework for Monetary Analysis, pages 46-48 National Bureau of Economic Research, Inc.
  17. Mccallum, Bennet T., 1988. "Robustness properties of a rule for monetary policy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 29(1), pages 173-203, January.
  18. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules And Macroeconomic Stability: Evidence And Some Theory," The Quarterly Journal of Economics, MIT Press, vol. 115(1), pages 147-180, February.
  19. West, Kenneth D, 1986. "Targeting Nominal Income: A Note," Economic Journal, Royal Economic Society, vol. 96(384), pages 1077-83, December.
  20. Andrew G. Haldane & Nicoletta Batini, 1998. "Forward-Looking Rules for Monetary Policy," NBER Working Papers 6543, National Bureau of Economic Research, Inc.
  21. Lars E. O. Svensson, 2000. "Open-Economy Inflation Targeting," NBER Working Papers 6545, National Bureau of Economic Research, Inc.
  22. Jody Overland & Christopher D. Carroll & David N. Weil, 2000. "Saving and Growth with Habit Formation," American Economic Review, American Economic Association, vol. 90(3), pages 341-355, June.
  23. Bennett T. McCallum, 1997. "The alleged instability of nominal income targeting," Reserve Bank of New Zealand Discussion Paper Series G97/6, Reserve Bank of New Zealand.
  24. Jeffrey C. Fuhrer, 1998. "An Optimising Model for Monetary Policy Analysis: Can Habit Formation Help?," RBA Research Discussion Papers rdp9812, Reserve Bank of Australia.
  25. repec:nbr:nberre:0126 is not listed on IDEAS
  26. 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.
  27. Marvin Goodfriend & Robert G. King, 1998. "The new neoclassical synthesis and the role of monetary policy," Working Paper 98-05, Federal Reserve Bank of Richmond.
  28. Kollman, R., 1996. "The Exchange Rate in a Dynamic-Optimizing Current Account Model with Nominal Rigidities: a Quantitative Investigation," Cahiers de recherche 9614, Universite de Montreal, Departement de sciences economiques.
  29. Taylor, John B., 1985. "What would nominal GNP targetting do to the business cycle?," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 22(1), pages 61-84, January.
  30. Bennett T. McCallum, 1985. "On Consequences and Criticisms of Monetary Targeting," NBER Working Papers 1596, National Bureau of Economic Research, Inc.
  31. Julio Rotemberg, 1987. "The New Keynesian Microfoundations," NBER Chapters, in: NBER Macroeconomics Annual 1987, Volume 2, pages 69-116 National Bureau of Economic Research, Inc.
  32. 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.
  33. repec:sae:niesru:v:145:y::i:1:p:43-63 is not listed on IDEAS
  34. Frankel, Jeffrey, 1995. "The Stabilizing Properties of a Nominal GNP Rule," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(2), pages 318-34, May.
  35. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, June.
  36. Michael Woodford, 1996. "Control of the Public Debt: A Requirement for Price Stability?," NBER Working Papers 5684, National Bureau of Economic Research, Inc.
  37. Bennett T. McCallum, 1997. "Issues in the Design of Monetary Policy Rules," NBER Working Papers 6016, National Bureau of Economic Research, Inc.
  38. Robert J. Gordon, 1983. "The Conduct of Domestic Monetary Policy," NBER Working Papers 1221, National Bureau of Economic Research, Inc.
  39. Roberts, John M, 1995. "New Keynesian Economics and the Phillips Curve," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 975-84, November.
  40. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
  41. Bean, Charles R, 1983. "Targeting Nominal Income: An Appraisal," Economic Journal, Royal Economic Society, vol. 93(372), pages 806-19, December.
  42. McCallum, Bennett T., 1994. "A semi-classical model of price-level adjustment," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 41(1), pages 251-284, December.
  43. Meade, James E, 1978. "The Meaning of "Internal Balance"," Economic Journal, Royal Economic Society, vol. 88(351), pages 423-35, September.
  44. Friedman, Milton, 1971. "A Monetary Theory of Nominal Income," Journal of Political Economy, University of Chicago Press, vol. 79(2), pages 323-37, March-Apr.
  45. Ireland, Peter N., 1997. "A small, structural, quarterly model for monetary policy evaluation," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 47(1), pages 83-108, December.
  46. Dennis, R., 1998. "Instability Under Nominal GDP Targeting: the Role of Expectations," Papers 347, Australian National University - Department of Economics.
  47. Aizenman, Joshua & Frenkel, Jacob A., 1986. "Targeting rules for monetary policy," Economics Letters, Elsevier, vol. 21(2), pages 183-187.
  48. Bennett T. McCallum & Edward Nelson, 1997. "An Optimizing IS-LM Specification for Monetary Policy and Business Cycle Analysis," NBER Working Papers 5875, National Bureau of Economic Research, Inc.
  49. Frederic S. Mishkin & Adam S. Posen, 1998. "Inflation Targeting: Lessons from Four Countries," NBER Working Papers 6126, National Bureau of Economic Research, Inc.
  50. Julio Rotemberg & Michael Woodford, 1997. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 297-361 National Bureau of Economic Research, Inc.
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  52. repec:dgr:kubcen:199667 is not listed on IDEAS
  53. Bennett T. McCallum, 1993. ""Specification and Analysis of a Monetary Policy Rule for Japan" Reply to Comments by Kunio Okina," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 11(2), pages 55-57, December.
  54. William Kerr & Robert G. King, 1996. "Limits on interest rate rules in the IS model," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 47-75.
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