Inflation Targeting versus Nominal Income Targeting

Helmut Frisch and Sylvia Staudinger
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Helmut Frisch: Technical University Vienna, Argentinierstraße 8, A-1040 Vienna (e-mails: helmut.frisch@tuwien.ac.at; sstaudin@pop.tuwien.ac.at)
Sylvia Staudinger: Technical University Vienna, Argentinierstraße 8, A-1040 Vienna (e-mails: helmut.frisch@tuwien.ac.at; sstaudin@pop.tuwien.ac.at)

Journal of Economics, 2003, vol. 78, issue 2, 113-137

Abstract: In this paper we analyze two different target regimes, flexible inflation targeting and nominal income targeting, under discretion in a simple dynamic macro model. The key results of our paper are: First, for both targeting regimes optimal monetary policy response leads to a shock-dependent feedback rule. Second, a demand shock is completely offset by both monetary strategies. Third, in case of a supply shock there is a significant difference between the two different targeting regimes. Under inflation targeting the policy makers face a trade-off between inflation and output stabilization. This trade-off depends on the weight Φ the policy makers attach to output stabilization relative to inflation stabilization in the loss function. In contrast, under nominal income targeting policy makers face a constant trade-off between inflation and real output growth: an increase in inflation leads to a fall in real output growth by an equal amount. Furthermore, in Appendix A we analyze a (linear) commitment solution for inflation targeting and compare it with the discretionary case. Under commitment, inflation is smaller and the output gap is larger than under discretion. In Appendix B, we investigate inflation targeting in a two-period time-lag version of the model. The qualitative results on the trade-off between inflation and output growth remain the same as in the basic model without time lag.

Keywords: Keywords: inflation targeting; nominal income targeting; optimal monetary policy.; JEL classification: E52; E58. (search for similar items in EconPapers)
Date: 2003
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Persistent link: https://EconPapers.repec.org/RePEc:kap:jeczfn:v:78:y:2003:i:2:d:10.1007_s00712-001-0538-1

DOI: 10.1007/s00712-001-0538-1

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