A fiscal perspective on nominal GDP targeting

Salem Abo‐Zaid, Huiying Chen and Ahmed Kamara

Economic Inquiry, 2021, vol. 59, issue 4, 1641-1660

Abstract: This paper studies fiscal policy in a model with nominal gross domestic product (GDP) targeting. We find that, with wage rigidity, nominal GDP targeting generates lower welfare losses than inflation targeting and a Taylor rule. On the other hand, adopting this regime makes standard fiscal policy rules, whereby distortionary tax rates are designed to respond to economic activity, dependent on the behavior of inflation instead. We also find that the fiscal multipliers with nominal GDP targeting are smaller than the multipliers under inflation targeting and the Taylor rule. Therefore, nominal GDP targeting does not necessarily outperform other monetary policy rules.

Date: 2021
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https://doi.org/10.1111/ecin.13016

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