Suboptimal Equilibria from Nominal GDP Targeting
22 Pages Posted: 1 Jul 2015
Date Written: June 29, 2015
We use a simple model to illustrate that nominal GDP targeting might produce a suboptimal equilibrium if there is a growth-maximizing rate of inflation. Following a shock, we find that targeting nominal GDP may result in lower real GDP growth than the economy could sustainably produce given its long-run potential. Importantly, our argument does not depend on problems with forecasting or implementation. We assume the monetary authority has no trouble hitting its nominal GDP target. So long as a growth-maximizing rate of inflation exists, the suboptimal outcome results under the best-case scenario where the rule is followed.
Keywords: Monetary Policy, Nominal GDP targeting, Inflation, Economic growth
JEL Classification: E42, E52, E41, E31
Suggested Citation: Suggested Citation