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Author: George Waters
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Languages : en
Pages :
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Book Description
Targeting Nominal GDP growth by monetary policymakers is equivalent to a restriction on policymaker preferences for an optimality condition derived under rational expectations. This paper reports the results of simulations of a calibrated model comparing Nominal GDP growth targeting with the optimal policy in an environment where public expectations are formed under learning and the interest rate rule is a function of public expectations. If the policymaker does not have full information about expectations, policy recommendations assuming rational expectations might lead to excess volatility. Nominal GDP growth targeting mitigates these problems in extreme cases, but cannot be recommended as a universal solution.
Author: George Waters
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
Targeting Nominal GDP growth by monetary policymakers is equivalent to a restriction on policymaker preferences for an optimality condition derived under rational expectations. This paper reports the results of simulations of a calibrated model comparing Nominal GDP growth targeting with the optimal policy in an environment where public expectations are formed under learning and the interest rate rule is a function of public expectations. If the policymaker does not have full information about expectations, policy recommendations assuming rational expectations might lead to excess volatility. Nominal GDP growth targeting mitigates these problems in extreme cases, but cannot be recommended as a universal solution.
Author: Kaushik Mitra
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ISBN:
Category :
Languages : en
Pages : 29
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Author: Nicholas Kumamoto
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Category : Global Financial Crisis, 2008-2009
Languages : en
Pages : 50
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Author: Richard Dennis
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Category : Gross domestic product
Languages : en
Pages : 46
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Author: Roberto M. Billi
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Category :
Languages : en
Pages :
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Author: David Beckworth
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Category :
Languages : en
Pages : 29
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Book Description
Some economists have advocated nominal GDP targeting as an alternative to the Taylor Rule. These arguments are largely based on the idea that nominal GDP targeting would require less knowledge on the part of policymakers than a traditional Taylor Rule. In particular, a nominal GDP targeting rule would not require real-time knowledge of the output gap. We examine the importance of this claim by amending a standard New Keynesian model to assume that the central bank has imperfect information about the output gap and therefore must forecast the output gap based on previous information. Forecast errors by the central bank can then potentially induce unanticipated changes in the short term nominal interest rate, distinct from a standard monetary policy shock. We show that forecast errors of the output gap by the Federal Reserve can account for up to 13% of the fluctuations in the output gap. In addition, our simulations imply that a nominal GDP targeting rule would produce lower volatility in both inflation and the output gap in comparison with the Taylor Rule under imperfect information.
Author: Michael T. Belongia
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Category :
Languages : en
Pages :
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Author: Jeffrey A. Frankel
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Category :
Languages : en
Pages : 14
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Author: Pranjul Bhandari
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Category : Economic stabilization
Languages : en
Pages : 31
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Book Description
The revival of interest in nominal GDP (NGDP) targeting has come in the context of large advanced economies. We consider the case for NGDP targeting for mid-sized developing countries, in light of their susceptibility to supply shocks and terms of trade shocks. For India, in particular, one major exogenous supply shock is the monsoon rains. NGDP targeting splits the impact of supply shocks automatically between inflation and real GDP growth. In the case of annual inflation targeting (IT), by contrast, the full impact of an adverse supply shock or terms of trade shock is felt as a loss in real GDP alone. NGDP targeting automatically accommodates supply shocks as most central banks with discretion would do anyway, while retaining the advantage of anchoring expectations as rules are designed to do. We outline a simple theoretical model and derive the condition under which an NGDP targeting regime would dominate other regimes such as annual IT for achieving objectives of output and price stability. We go on to estimate for the case of India the parameters needed to ascertain whether the condition holds, particularly the slope of the aggregate supply curve. Estimates suggest that the condition may indeed hold.
Author: Julio Garín
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Category : Common good
Languages : en
Pages : 40
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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.
