Nominal GDP Stabilization: Chasing a Mirage

41 Pages Posted: 20 Jan 2015 Last revised: 5 Jun 2017

See all articles by Vipin P. Veetil

Vipin P. Veetil

Indian Institute of Technology Madras

Richard E. Wagner

George Mason University - Department of Economics

Date Written: January 19, 2015

Abstract

This paper argues that NGDP targeting is unlikely to produce macroeconomic stability. Contrary to the policy objective, NGDP targeting can increase macroeconomic turbulence. DSGE models that prove the effectiveness of NGDP stabilization policy rest on two assumptions. The first assumption is that macroeconomic volatility is a consequence of exogenous shocks to an otherwise stable system. The second assumption is that central banks can act upon aggregate variables. Neither of these assumptions is accurate. An economy is an ecology of interacting agents, some of whom have rivalrous plans. Macroeconomic volatility is an endogenous and intrinsic feature of such an economic system. Furthermore, central banks act upon some agents in the economic system, not on aggregate variables. The percolation of central bank actions through production networks can impede coordination efforts of economic agents during recessions, thereby increasing macroeconomic volatility.

Keywords: NGDP targeting; complex systems theory; micro-foundations; time and economics; non-equilibrium theory; entrepreneurship; economic kaleidics; recessions as economically productive

JEL Classification: B40, D51, E32, E42, E52

Suggested Citation

Veetil, Vipin P. and Wagner, Richard E., Nominal GDP Stabilization: Chasing a Mirage (January 19, 2015). GMU Working Paper in Economics No. 15-02. Available at SSRN: https://ssrn.com/abstract=2552321 or http://dx.doi.org/10.2139/ssrn.2552321

Vipin P. Veetil

Indian Institute of Technology Madras

Chennai
India

Richard E. Wagner (Contact Author)

George Mason University - Department of Economics ( email )

4400 University Drive
334 Enterprise Hall
Fairfax, VA 22030
United States
(703) 993-1132 (Phone)

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