Expectations and NGDP Targeting: Supply-Side Problems with Demand-Side Policy

Journal of Private Enterprise, forthcoming

25 Pages Posted: 9 Oct 2014 Last revised: 21 Apr 2018

See all articles by Alexander William Salter

Alexander William Salter

Texas Tech University - Rawls College of Business; American Institute for Economic Research

Thomas L. Hogan

Rice University - Baker Institute for Public Policy

Date Written: April 12, 2018

Abstract

This paper considers the effects of changing expectations under macroeconomic policies that rely on targeting nominal variables, such as NGDP targeting. These proposals, in line with a dynamic conception of the equation of exchange, argue that the monetary authority can achieve any dynamic monetary equilibrium, provided favorable public expectations. The problem of changing public expectations, however, cannot be assumed away. Because the public may only find a subset of dynamic monetary equilibria attainable, attempts to coordinate around an equilibrium perceived to be unobtainable can have unintended consequences. We demonstrate in a New Keynesian model that demand-side stabilization policy can shift inflation expectations, resulting in supply-side difficulties. This problem serves as a warning against demand-side fundamentalism in macroeconomic policy.

Keywords: Aggregate Demand Stabilization, Expectations, Monetary Equilibrium, Monetary Policy, NGDP Targeting, Stagflation, Supply Side

JEL Classification: E32, E52, E58, E66

Suggested Citation

Salter, Alexander William and Hogan, Thomas L., Expectations and NGDP Targeting: Supply-Side Problems with Demand-Side Policy (April 12, 2018). Journal of Private Enterprise, forthcoming. Available at SSRN: https://ssrn.com/abstract=2506836 or http://dx.doi.org/10.2139/ssrn.2506836

Alexander William Salter (Contact Author)

Texas Tech University - Rawls College of Business ( email )

Lubbock, TX 79409
United States

HOME PAGE: http://awsalter.com

American Institute for Economic Research

PO Box 1000
Great Barrington, MA 01230
United States

Thomas L. Hogan

Rice University - Baker Institute for Public Policy ( email )

6100 Main Street, MS-40
Houston, TX 77005
United States

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