Alternative Nominal Anchors

Peter Ireland

Canadian Journal of Economics, 1998, vol. 31, issue 2, 365-384

Abstract: In this paper, the choice of an intermediate target for monetary policy is considered using a model that allows each alternative to be judged based on its welfare effects, measured using a representative household's utility function. The results show that nominal income targeting is preferable to money supply targeting since it provides an appropriate response to money demand shocks. Price-level targeting dominates nominal income targeting, however, since it also provides an appropriate response to technology shocks. In fact, these results imply that price-level targeting represents the optimal monetary policy.

Date: 1998
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