Targeting Nominal Income Growth or Inflation?
- (pp. 928-956)
AbstractWithin 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)
CitationJensen, Henrik. 2002. "Targeting Nominal Income Growth or Inflation? ." American Economic Review, 92 (4): 928-956. DOI: 10.1257/00028280260344533
- E52 Monetary Policy
- E23 Macroeconomics: Production
- E31 Price Level; Inflation; Deflation