 Nominal GDP growth targeting vs. Taylor rules in a model with financial frictionsArchil Dvalishvili, Mikheil Dvalishvili and Thom Thurston Economic Modelling, 2024, vol. 141, issue C Abstract: Nominal GDP growth targeting has gained favor over the last few decades in monetary policy literature (e.g., Ireland 2020; Garín et al. 2016; Beckworth and Hendrickson 2020). Calibrated, small-scale New Keynesian DSGE models have supported the proposition that nominal GDP growth (NGDP growth) rate targeting will improve welfare as compared with alternative strategies such as inflation targeting and Taylor rules with standard parameter settings. This paper examines that proposition in the context of a medium-scale New Keynesian model having a financial sector with frictions. In that model, NGDP growth rate targeting does poorly as compared with the Optimal Taylor rule and a wide range of Taylor rule settings leading up to the Optimal (representative agent utility maximizing) Taylor rule. The presence of the financial sector reveals that not only is NGDP growth rate targeting the least successful among the alternative targets and rules in creating welfare in this model; NGDP growth rate targeting also creates dramatically higher volatility of the policy rate and most financial variables. Keywords: Taylor rule; Optimal Taylor rule; NGDP growth targeting; Inflation targeting (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:141:y:2024:i:c:s0264999324002578 DOI: 10.1016/j.econmod.2024.106900 Access Statistics for this article Economic Modelling is currently edited by S. Hall and P. Pauly More articles in Economic Modelling from Elsevier |
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