Targeting Nominal Income Growth or Inflation?

43 Pages Posted: 3 Mar 2000

See all articles by Henrik Jensen

Henrik Jensen

University of Copenhagen - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: November 1999

Abstract

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 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 behavior that improves the inflation-output gap trade-off. Somewhat paradoxically, inflation targeting is relatively less favorable the more society cares for inflation, and the more persistent are the effects of inflation-generating shocks.

JEL Classification: E42, E52, F85

Suggested Citation

Jensen, Henrik, Targeting Nominal Income Growth or Inflation? (November 1999). Available at SSRN: https://ssrn.com/abstract=208108 or http://dx.doi.org/10.2139/ssrn.208108

Henrik Jensen (Contact Author)

University of Copenhagen - Department of Economics ( email )

Øster Farimagsgade 5
Bygning 26
1353 Copenhagen K.
Denmark
+45 35 323 043 (Phone)
+45 35 323 000 (Fax)

HOME PAGE: http://hjeconomics.dk

Centre for Economic Policy Research (CEPR)

London
United Kingdom