American Economic Review: Vol. 92 No. 4 (September 2002)
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Targeting Nominal Income Growth or Inflation?
Jensen, Henrik. 2002. "Targeting Nominal Income Growth or Inflation? ." American Economic Review, 92(4): 928-956.
Within a simple New Keynesian model emphasizing forward-looking behavior of private agents, I evaluate optimal nominal income growth targeting versus optimal inflation targeting. When the economy is mainly subject to shocks that do not involve monetary policy trade-offs for society, inflation targeting is preferable. Otherwise, nominal income growth targeting may be superior because it induces inertial policy making, which improves the inflation-output-gap trade-off. Somewhat paradoxically, inflation targeting may be relatively less favorable the more society dislikes inflation, and the more persistent are the effects of inflation-generating shocks. (JEL E42, E52, F58)
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