Nominal GDP Targeting Under Learning

Abstract

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.

Keywords: Learning; Monetary Policy; Interest Rate Rules

JEL Classification: E52; E31; D84