Welfare implications of nomimal GDP targeting in a small open economy

Marco Ortiz, Arthur Inca and Fabrizio Solf

MPRA Paper from University Library of Munich, Germany

Abstract: Nominal GDP targeting (NGDP) rules have gained attention as a potential alternative to traditional models of monetary policy. In this paper, we extend the analysis of the welfare implications of NGDP rules within a New Keynesian model with nominal price and wage rigidities. Using a welfare function derived from the utility of consumers, we compare the NGDP target with a domestic inflation target, a CPI inflation target, and a Taylor rule in a small open economy scenario. Our simulations reveal that NGDP rules confer advantages on a central bank when the economy faces supply shocks, while their performance against demand shocks is comparable to that of a CPI target rule. These findings suggest that NGDP targeting could be a useful policy framework for central banks seeking to enhance their ability to stabilize the economy.

Keywords: Nominal GDP targeting; optimal monetary policy; General equilibrium; open economy macroeconomics. (search for similar items in EconPapers)
JEL-codes: E31 E32 E52 F41 (search for similar items in EconPapers)
Date: 2024-01-28
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-inv, nep-mon and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:119999

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