DP2341 Targeting Nominal Income Growth or Inflation?

Author(s): Henrik Jensen
Publication Date: December 1999
Keyword(s): Inflation Targeting, Interest Rate Inertia, Monetary Policy, Nominal Income Growth Targeting
JEL(s): E42, E52, F58
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=2341

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.