A Simple Empirical Investigation into the Optimal Size of the NGDP Target and Level Targeting

Abstract

This paper constructs an index to study two questions within a growing school of macroeconomic thought, Market Monetarism. This school argues that the central bank has full control over all nominal variables in the economy and is solely responsible for aggregate demand management. To manage aggregate demand, Market Monetarism argues the central bank should target Nominal GDP. This paper constructs an index that hopes to answer two questions. First, it attempts to determine size of the optimal NGDP target. Second, it attempts to determine the extent to which central banks should engage in level targeting, that is, whether it should correct past errors in hitting its target. We find evidence consistent with a five percent level target but are unable to find evidence regarding level targeting.

Keywords: Market Monetarism, NGDP Targeting, Level Targeting, Misery Index

JEL Classification: E3, E5