Nominal GDP Targeting with Heterogeneous Labor Supply

James Bullard and Aarti Singh

No 2017-03, Working Papers from University of Sydney, School of Economics

Abstract: We study nominal GDP targeting as optimal monetary policy in a model with a credit market friction following Azariadis, Bullard, Singh and Suda (2018), henceforth ABSS. As in ABSS, the macroeconomy we study has considerable income inequality which gives rise to a large pri- vate sector credit market. Households participating in this market use non-state contingent nominal contracts (NSCNC). We extend the ABSS framework to allow for endogenous and heterogeneous household labor supply among credit market participant households. We show that nom- inal GDP targeting continues to characterize optimal monetary policy in this setting. Optimal monetary policy repairs the distortion caused by the credit market friction and so leaves heterogeneous households supply- ing their desired amount of labor, a type of divine coincidence result. We also analyze the incomplete markets equilibrium that exists when the monetary policymaker pursues a suboptimal policy, and show how an ex- tension to more general preferences can limit the ability of the policymaker to provide full insurance to households in this setting.

Keywords: Non-state contingent nominal contracting; optimal mone- tary policy; nominal GDP targeting; life cycle economies; heterogeneous households; credit market participation; labor supply. (search for similar items in EconPapers)
Date: 2017-02, Revised 2019-01
New Economics Papers: this item is included in nep-mac and nep-mon
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Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Nominal GDP Targeting with Heterogeneous Labor Supply (2020)
Working Paper: Nominal GDP Targeting with Heterogenous Labor Supply (2018)
Working Paper: Nominal GDP Targeting With Heterogeneous Labor Supply (2017)
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