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On the desirability of nominal GDP targeting

Julio Garin, Robert Lester () and Eric Sims ()

Journal of Economic Dynamics and Control, 2016, vol. 69, issue C, 21-44

Abstract: This paper evaluates the welfare properties of nominal GDP targeting in the context of a New Keynesian model with both price and wage rigidity. In particular, we compare nominal GDP targeting to inflation and output gap targeting as well as to a conventional Taylor rule. These comparisons are made on the basis of welfare losses relative to a hypothetical equilibrium with flexible prices and wages. Output gap targeting is the most desirable of the rules under consideration, but nominal GDP targeting performs almost as well. Nominal GDP targeting is associated with smaller welfare losses than a Taylor rule and significantly outperforms inflation targeting. Relative to inflation targeting and a Taylor rule, nominal GDP targeting performs best conditional on supply shocks and when wages are sticky relative to prices. Nominal GDP targeting may outperform output gap targeting if the gap is observed with noise, and has more desirable properties related to equilibrium determinacy than does gap targeting.

Keywords: Optimal policy; Nominal targeting; Monetary policy (search for similar items in EconPapers)
JEL-codes: E31 E47 E52 E58 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (42)

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Working Paper: On the Desirability of Nominal GDP Targeting (2015) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:69:y:2016:i:c:p:21-44

DOI: 10.1016/j.jedc.2016.05.004

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Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

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