Targeting nominal income growth or inflation?

TY - JOUR

T1 - Targeting nominal income growth or inflation?

AU - Jensen, Henrik

N1 - JEL Classification: E42, E52, F58

PY - 2002

Y1 - 2002

N2 - 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

AB - 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

U2 - 10.1257/00028280260344533

DO - 10.1257/00028280260344533

M3 - Journal article

SN - 0002-8282

VL - 92

SP - 928

EP - 956

JO - American Economic Review

JF - American Economic Review

IS - 4

ER -