Suboptimal Equilibria from Nominal GDP Targeting

18 Pages Posted: 1 Jul 2015 Last revised: 11 Jun 2019

See all articles by Thomas L. Hogan

Thomas L. Hogan

American Institute for Economic Research

William J. Luther

Florida Atlantic University; American Institute for Economic Research

Date Written: April 18, 2019

Abstract

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 might 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 when the rule is followed.

Keywords: Monetary Policy, Nominal GDP targeting, Inflation, Economic growth

JEL Classification: E42, E52, E41, E31

Suggested Citation

Hogan, Thomas L. and Luther, William J., Suboptimal Equilibria from Nominal GDP Targeting (April 18, 2019). AIER Sound Money Project Working Paper Forthcoming, Available at SSRN: https://ssrn.com/abstract=2624828 or http://dx.doi.org/10.2139/ssrn.2624828

Thomas L. Hogan

American Institute for Economic Research ( email )

PO Box 1000
Great Barrington, MA 01230
United States

William J. Luther (Contact Author)

Florida Atlantic University ( email )

777 Glades Road
Boca Raton, FL 33431
United States

HOME PAGE: http://www.wluther.com

American Institute for Economic Research ( email )

PO Box 1000
Great Barrington, MA 01230
United States

HOME PAGE: http://www.aier.org/staff/william-j-luther

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