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Targeting Nominal Income: A Note

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  • Kenneth D. West

Abstract

This paper compares nominal income and monetary targets in a standard aggregate demand - aggregate supply framework. If the desirability of policies is measured by their effect on the unconditional variance of output, nominal income targeting is preferable if and only if the aggregate elasticity of demand for real balances is greater than one. This is precisely the opposite of the condition that in Bean (1984) is sufficient to make nominal income targeting preferable.This points out the importance of specification of supply and of objective function in work on nominal income targeting.

Suggested Citation

  • Kenneth D. West, 1986. "Targeting Nominal Income: A Note," NBER Working Papers 1835, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:1835
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    References listed on IDEAS

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    1. Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, vol. 63(3), pages 326-334, June.
    2. repec:nbr:nberre:0126 is not listed on IDEAS
    3. Fischer, Stanley, 1977. "Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 191-205, February.
    4. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
    5. Bean, Charles R, 1983. "Targeting Nominal Income: An Appraisal," Economic Journal, Royal Economic Society, vol. 93(372), pages 806-819, December.
    6. Sargent, Thomas J & Wallace, Neil, 1975. ""Rational" Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 83(2), pages 241-254, April.
    7. Tobin, James, 1983. "Monetary Policy: Rules, Targets, and Shocks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 15(4), pages 506-518, November.
    8. 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.
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    Cited by:

    1. Timonen, Jouni, 1995. "Nominal income as an intermediate target for monetary policy," Bank of Finland Research Discussion Papers 21/1995, Bank of Finland.
    2. Todd E. Clark, 1994. "Nominal GDP targeting rules: can they stabilize the economy?," Economic Review, Federal Reserve Bank of Kansas City, vol. 79(Q III), pages 11-25.
    3. Robert E. Hall & N. Gregory Mankiw, 1994. "Nominal Income Targeting," NBER Chapters, in: Monetary Policy, pages 71-94, National Bureau of Economic Research, Inc.
    4. Koenig, Evan F., 1996. "Targeting nominal income: A closer look," Economics Letters, Elsevier, vol. 51(1), pages 89-93, April.
    5. Benjamin M. Friedman & Kenneth N. Kuttner, 1996. "A Price Target for U.S. Monetary Policy? Lessons from the Experience with Money Growth Targets," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1), pages 77-146.
    6. Jeffrey Frankel, 2011. "A Comparison Of Product Price Targeting And Other Monetary Anchor Options, For Commodity Exporters In Latin America," Economía Journal, The Latin American and Caribbean Economic Association - LACEA, vol. 0(Fall 2011), pages 1-70, August.
    7. Fang, Chung-rou & Lai, Ching-chong, 2002. "Targeting nominal income versus targeting price level: A target zone perspective," International Review of Economics & Finance, Elsevier, vol. 11(3), pages 229-249.
    8. Laurence Ball, 1999. "Efficient Rules for Monetary Policy," International Finance, Wiley Blackwell, vol. 2(1), pages 63-83, April.
    9. 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.
    10. Roberto M. Billi, 2020. "Output Gaps and Robust Monetary Policy Rules," International Journal of Central Banking, International Journal of Central Banking, vol. 16(2), pages 125-152, March.
    11. McCallum, Bennett T., 1999. "Issues in the design of monetary policy rules," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 23, pages 1483-1530, Elsevier.
    12. Paul Söderlind, 2008. "Monetary Policy Effects On Financial Risk Premia," Manchester School, University of Manchester, vol. 76(6), pages 690-707, December.
    13. Jeffrey A. Frankel and Norbert Funke., 1994. "A Two-Country Analysis of International Targeting of Nominal GNP," Center for International and Development Economics Research (CIDER) Working Papers C94-035, University of California at Berkeley.
    14. Woodford Michael, 2002. "Inflation Stabilization and Welfare," The B.E. Journal of Macroeconomics, De Gruyter, vol. 2(1), pages 1-53, February.
    15. Billi, Roberto M., 2018. "Price level targeting and risk management," Economic Modelling, Elsevier, vol. 73(C), pages 163-173.
    16. Stuart Sayer, 1995. "Macroeconomic Policy Analysis," Metroeconomica, Wiley Blackwell, vol. 46(3), pages 290-308, October.
    17. Guender, Alfred V. & Tam, Julie, 2004. "On the performance of nominal income targeting as a strategy for monetary policy in a small open economy," Journal of International Money and Finance, Elsevier, vol. 23(2), pages 143-163, March.
    18. Malik, Hamza, 2005. "Price Level vs. Nominal Income Targeting: Aggregate Demand Shocks and the Cost Channel of Monetary Policy Transmission," MPRA Paper 456, University Library of Munich, Germany, revised Aug 2006.
    19. Jeffrey A. Frankel, 2010. "A Comparison of Monetary Anchor Options, Including Product Price Targeting, for Commodity-Exporters in Latin America," NBER Working Papers 16362, National Bureau of Economic Research, Inc.
    20. Lai, Ching-chong & Chen, Shu-hua & Shaw, Ming-fu, 2005. "Nominal income targeting versus money growth targeting in an endogenously growing economy," Economics Letters, Elsevier, vol. 86(3), pages 359-366, March.

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