Elsevier

Economics Letters

Volume 95, Issue 2, May 2007, Pages 217-222
Economics Letters

A comparative analysis of the stabilizing properties of nominal income growth targeting

https://doi.org/10.1016/j.econlet.2006.10.006Get rights and content

Abstract

Given highly persistent cost-push shocks, the relative performance of nominal income growth targeting depends critically on the size of two key parameters. Barring extreme preferences, nominal income growth targeting performs fairly well relative to commitment and pure discretion for small values of the Phillips Curve parameter.

Section snippets

Defining the nominal income growth target

Letting xt denote the level of real output, we define pt + xt as current nominal income. The output gap is given by yt = xt  t where t denotes the potential level of output. If k represents the growth rate of potential output, then it follows that k = t  t−1.

After setting k equal to zero and assuming the target for nominal income growth to be equal to zero, we can state the policy rule as:ytyt1+πt=0

Eq. (1) is similar to the policy rule under policy from the timeless perspective or a speed

Evaluation of nominal income growth targeting

The forward-looking model serves as the frame of reference for the analysis conducted in this section. It consists of a Phillips Curve and an IS relation:πt=βEtπt+1+ayt+utyt=Etyt+1a1rt+vt

    yt

     =   the output gap

    rt

     =   the real rate of interest

    πt

     =   the rate of inflation

    Et

     =   expectation based on information available at time t

    a and a1

    positive parameters

    ut and vt

    random disturbances that follow an autoregressive process

ut=ρut1+uˆt0ρ<1uˆtN(0,σuˆ2)vt=υvt1+vˆt0υ<1vˆtN(0,σvˆ2)

To simplify the analysis, we

Conclusion

Taken altogether, from a theoretical perspective nominal income growth targeting can be a suitable choice for policy in an environment where price stability is the primary but not exclusive concern of policy. However, this positive assessment of the stabilizing properties of nominal income growth targeting depends largely on a rather small value for the key parameter a.

References (4)

  • Richard Clarida et al.

    The science of monetary policy: a new Keynesian perspective

    Journal of Economic Literature

    (1999)
  • Henrik Jensen

    Targeting nominal income growth or inflation?

    American Economic Review

    (2002)
There are more references available in the full text version of this article.

Cited by (0)

I would like to thank Richard Froyen, Ed Maberly, and in particular an anonymous referee for helpful comments. All errors are the sole responsibility of the author.

View full text