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Title: Targeting Nominal Income Growth or Inflation?

Author(s): Henrik Jensen

Publication Date: December 1999

Keyword(s): Inflation Targeting, Interest Rate Inertia, Monetary Policy and Nominal Income Growth Targeting

Programme Area(s): International Macroeconomics

Abstract: Within a simple New Keynesian model emphasizing forward-looking behaviour of private agents, I evaluate optimal nominal income growth targeting versus optimal inflation targeting. When the economy under consideration 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 interest rate behaviour that improves the inflation-output gap trade-off. Somewhat paradoxically, inflation targeting is relatively less favourable the more society cares for inflation, and the more persistent are the effects of inflation-generating shocks.

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Bibliographic Reference

Jensen, H. 1999. 'Targeting Nominal Income Growth or Inflation?'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=2341