Using a nominal GDP rule to guide discretionary monetary policy

John P. Judd and Brian Motley

Economic Review, 1993, 3-11

Abstract: Given doubts about the reliability of the monetary aggregates as intermediate targets of monetary policy, the Federal Reserve attempts to meet its dual goals--gradual reduction of inflation and mitigation of cyclical downturns in output--through purely discretionary adjustments of an interest rate instrument in response to myriad incoming data. A procedure in which the Fed would consult a nominal GDP feedback rule, while retaining the flexibility to use discretion in its monetary policy decisions, might contribute to achieving its long-run inflation goal without significantly interfering with its ability to pursue its short-run cyclical goal. This paper describes such a policy regime, and presents some empirical evidence pertinent to an assessment of how it might work.

Keywords: Monetary policy - United States; Inflation (Finance); Gross domestic product (search for similar items in EconPapers)
Date: 1993
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