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The alleged instability of nominal income targeting

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Abstract

Recently it has been argued that a monetary policy of nominal income targeting would result in dynamically unstable processes for output and inflation. That result holds in a theoretical model that includes backward-looking IS and Phillips curve relations, but these are rather special and theoretically unattractive. The present paper demonstrates that replacement of the special Phillips curve with one of several more plausible specifications overturns the instability result, whether or not the IS equation is replaced with a forward-looking version. Thus the instability result is quite fragile and therefore provides almost no basis for a negative judgment regarding nominal income targeting.

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  • 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.
  • Handle: RePEc:nzb:nzbdps:1997/06
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    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)

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