Better Risk Sharing Through Monetary Policy?: The Financial Stability Case for a Nominal GDP Target

22 Pages Posted: 21 Dec 2018 Last revised: 9 Jan 2019

See all articles by David Beckworth

David Beckworth

Mercatus Center at George Mason University

Date Written: December 3, 2018

Abstract

A series of papers have shown that a monetary regime targeting nominal GDP (NGDP) can reproduce the distribution of risk that would exist if there were widespread use of state-contingent debt securities (Koenig, 2013; Sheedy, 2014; Azariadis et al., 2016, Bullard and DiCecia, 2018). This paper empirically evaluates this view by exploiting an implication of the theory: those countries whose NGDP stayed closest to its expected pre-crisis growth path during the crisis should have experienced the least financial instability. This paper constructs an NGDP gap measure for 21 advanced economies that is used to test this implication. The results strongly suggest that there is a meaningful role for NGDP in promoting financial and economic stability.

Keywords: NGDP Targeting, Financial Stability, State-Contingent Debt Contracts, Panel VAR, Local Projection

JEL Classification: E5, E6

Suggested Citation

Beckworth, David, Better Risk Sharing Through Monetary Policy?: The Financial Stability Case for a Nominal GDP Target (December 3, 2018). Available at SSRN: https://ssrn.com/abstract=3295233 or http://dx.doi.org/10.2139/ssrn.3295233

David Beckworth (Contact Author)

Mercatus Center at George Mason University ( email )

3434 Washington Blvd. 4th Floor
Arlington, VA 22201
United States

HOME PAGE: http://macromarketbusiness.blogspot.com

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