Suboptimal Equilibria from Nominal GDP Targeting

22 Pages Posted: 1 Jul 2015  

Thomas L. Hogan

Troy University

William J. Luther

Kenyon College

Date Written: June 29, 2015

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 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

Hogan, Thomas L. and Luther, William J., Suboptimal Equilibria from Nominal GDP Targeting (June 29, 2015). Available at SSRN: https://ssrn.com/abstract=2624828 or http://dx.doi.org/10.2139/ssrn.2624828

Thomas L. Hogan

Troy University ( email )

Troy, AL
United States

William J. Luther (Contact Author)

Kenyon College ( email )

Gambier, OH 43022
United States

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

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