Nominal GDP Targeting with Heterogeneous Labor Supply

51 Pages Posted: 29 Jun 2017 Last revised: 21 Feb 2019

See all articles by James Bullard

James Bullard

Federal Reserve Banks - Federal Reserve Bank of St. Louis

Aarti Singh

The University of Sydney - School of Economics

Date Written: 2017-02-17

Abstract

We study nominal GDP targeting as optimal monetary policy in a model with a credit market friction following Azariadis, Bullard, Singh and Suda (2018), henceforth ABSS. As in ABSS, the macroeconomy we study has considerable income inequality which gives rise to a large private sector credit market. Households participating in this market use non-state contingent nominal contracts (NSCNC). We extend the ABSS framework to allow for endogenous and heterogeneous household labor supply among credit market participant households. We show that nominal GDP targeting continues to characterize optimal monetary policy in this setting. Optimal monetary policy repairs the distortion caused by the credit market friction and so leaves heterogeneous households supplying their desired amount of labor, a type of "divine coincidence" result. We also analyze the incomplete markets equilibrium that exists when the monetary policymaker pursues a suboptimal policy, and show how an extension to more general preferences can limit the ability of the policymaker to provide full insurance to households in this setting.

Keywords: Non-state contingent nominal contracting, optimal monetary policy, nominal GDP targeting, life cycle economies, heterogeneous households, credit market participation, labor supply

JEL Classification: E4, E5

Suggested Citation

Bullard, James and Singh, Aarti, Nominal GDP Targeting with Heterogeneous Labor Supply (2017-02-17). FRB St. Louis Working Paper No. 2017-16. Available at SSRN: https://ssrn.com/abstract=2994714 or http://dx.doi.org/10.20955/wp.2017.016

James Bullard (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

P.O. Box 442
411 Locust Street
St. Louis, MO 63166
United States
314-444-8576 (Phone)

Aarti Singh

The University of Sydney - School of Economics ( email )

Rm 370 Merewether (H04)
Sydney, NSW 2006 2008
Australia

HOME PAGE: http://sydney.edu.au/arts/economics/staff/academic/aarti_singh.shtml

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