Discussion paper

DP2341 Targeting Nominal Income Growth or Inflation?

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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Citation

Jensen, H (1999), ‘DP2341 Targeting Nominal Income Growth or Inflation?‘, CEPR Discussion Paper No. 2341. CEPR Press, Paris & London. https://cepr.org/publications/dp2341