On the Desirability of Nominal GDP Targeting

NBER Working Paper No. 21420

Issued in July 2015

NBER Program(s):Economic Fluctuations and Growth, Monetary Economics



This paper evaluates the welfare properties of nominal GDP targeting in the context of a New Keynesian model with both price and wage rigidity. In particular, we compare nominal GDP targeting to inflation and output gap targeting as well as to a conventional Taylor rule. These comparisons are made on the basis of welfare losses relative to a hypothetical equilibrium with flexible prices and wages. Output gap targeting is the most desirable of the rules under consideration, but nominal GDP targeting performs almost as well. Nominal GDP targeting is associated with smaller welfare losses than a Taylor rule and significantly outperforms inflation targeting. Relative to inflation targeting and a Taylor rule, nominal GDP targeting performs best conditional on supply shocks and when wages are sticky relative to prices. Nominal GDP targeting may outperform output gap targeting if the gap is observed with noise, and has more desirable properties related to equilibrium determinacy than does gap targeting.

Acknowledgments

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w21420

Published: Julio Garín & Robert Lester & Eric Sims, 2016. "On the Desirability of Nominal GDP Targeting," Journal of Economic Dynamics and Control, . citation courtesy of

Users who downloaded this paper also downloaded* these: