On the Efficiency of Nominal GDP Targeting in a Large Open Economy

Matthew Hoelle and Udara Peiris

Purdue University Economics Working Papers from Purdue University, Department of Economics

Abstract: Since 2007 there have been increasing calls to abandon a regime of Stabilizing Inflation (SI) in favor of Nominal GDP (NGDP) targeting. One argument in favor of NGDP targeting is that it allows inflation to redistribute resources among bond holders efficiently. Here we examine this claim in a large open monetary economy and show that, in contrast to SI, NGDP targeting is in fact (Pareto) efficient in a world with stochastic real uncertainty, and in the absence of complete insurance markets (only nominally risk free bonds are available). However this result is ultimately fragile and breaks down once we attempt to deviate from the simplistic setting necessary for the result to hold.

Keywords: monetary policy; open economy; uncertainty; incomplete markets; Pareto efficiency. (search for similar items in EconPapers)
JEL-codes: D50 E31 E40 E50 F41 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2013-02
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:pur:prukra:1273

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