A comparative analysis of the stabilizing properties of nominal income growth targeting☆
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 − x¯t where x¯t denotes the potential level of output. If k represents the growth rate of potential output, then it follows that k = x¯t − x¯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:
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:
- 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
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)
- et al.
The science of monetary policy: a new Keynesian perspective
Journal of Economic Literature
(1999) Targeting nominal income growth or inflation?
American Economic Review
(2002)
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.