Targeting Nominal Income Growth or Inflation?

Henrik Jensen

No 2341, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Within a simple New Keynesian model emphasizing forward-looking behaviour of private agents, I evaluate optimal nominal income growth targeting versus optimal inflation targeting. When the economy under consideration is mainly subject to shocks that do not involve monetary policy trade-offs for society, inflation targeting is preferable. Otherwise, nominal income growth targeting may be superior because it induces inertial interest rate behaviour that improves the inflation-output gap trade-off. Somewhat paradoxically, inflation targeting is relatively less favourable the more society cares for inflation, and the more persistent are the effects of inflation-generating shocks.

Keywords: Inflation Targeting; Interest Rate Inertia; Monetary Policy; Nominal Income Growth Targeting (search for similar items in EconPapers)
JEL-codes: E42 E52 (search for similar items in EconPapers)
Date: 1999-12
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Citations: View citations in EconPapers (20)

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Journal Article: Targeting Nominal Income Growth or Inflation? (2002)
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