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Nominal GDP Targeting with Heterogeneous Labor Supply

James Bullard and Aarti Singh ()

No 2017-03, Working Papers from University of Sydney, School of Economics

Abstract: We study nominal GDP targeting as optimal monetary policy in a model with a credit market friction following Azariadis, Bullard, Singh and Suda (2016), henceforth ABSS. As in ABSS, the macroeconomy we study has considerable income inequality which gives rise to a large private sector credit market. Households participating in this market use non-state contingent nominal contracts (NSCNC). We extend the ABSS framework to allow for endogenous and heterogeneous household labor supply among credit market participant households. We show that nominal GDP targeting continues to characterize optimal monetary policy in this setting. Optimal monetary policy repairs the distortion caused by the credit market friction and so leaves heterogeneous households supplying their desired amount of labor, a type of "divine coincidence" result. We also analyze the case when there is an aging population. We interpret these findings in light of the recent debate in monetary policy concerning labor force participation.

Keywords: Non-state contingent nominal contracting; optimal monetary policy; nominal GDP targeting; life cycle economies; heterogeneous households; credit market participation; labor supply. (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-mon
Date: 2017-02
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