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Targeting Nominal Income Growth or Inflation?

  • Henrik Jensen

Within a simple New Keynesian model emphasizing forward-looking behavior of private agents, I evaluate optimal nominal income growth targeting versus optimal inflation targeting. When the economy under consideration is mainly subject to shocks that do not involve monetary policy trade-offs for society, inflation targeting is preferable. Otherwise, nominal income growth targeting may be superior because it induces inertial interest rate behavior that improves the inflation-output gap trade-off. Somewhat paradoxically, inflation targeting is relatively less favorable the more society cares for inflation, and the more persistent are the effects of inflation-generating shocks.

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Paper provided by Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics in its series EPRU Working Paper Series with number 99-23.

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Handle: RePEc:kud:epruwp:99-23
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