 A two-for-one deal: Targeting nominal GDP to create a supply-shock robust inflation targetDavid Beckworth and Patrick J. Horan Journal of Policy Modeling, 2024, vol. 46, issue 6, 1071-1089 Abstract: A key tenet of modern central banking says that if inflation expectations are anchored then monetary policy should “look through” the inflationary effects of supply shocks that do not permanently affect potential output. However, the inflation surge of 2021–2022 vividly demonstrated that this standard monetary policy prescription is difficult to implement in practice since it requires a real-time knowledge of what shocks are driving changes in inflation while requiring a credible nominal anchor. This paper argues that a workaround solution to these problems is for central banks to stabilize the growth path of nominal GDP. Doing so allows central banks to look through short-term inflation movements caused by temporary supply shocks while still anchoring medium-run inflation. Therefore, central banks that target nominal GDP also are effectively targeting medium-run inflation. This two-for-one targeting deal not only solves the knowledge problem while keeping inflation anchored but can be implemented via standard Taylor-like rules. This paper shows how to operationalize such a framework for the case of the United States. Keywords: Monetary policy; Inflation; Federal Reserve; Nominal GDP (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:jpolmo:v:46:y:2024:i:6:p:1071-1089 DOI: 10.1016/j.jpolmod.2024.05.014 Access Statistics for this article Journal of Policy Modeling is currently edited by A. M. Costa More articles in Journal of Policy Modeling from Elsevier |
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