Optimal Monetary Policy for the Masses
37 Pages Posted: 26 Mar 2019 Last revised: 3 Apr 2019
Date Written: 2019-03-22
We study nominal GDP targeting as optimal monetary policy in a simple and stylized model with a credit market friction. The macroeconomy we study has considerable income inequality, which gives rise to a large private sector credit market. There is an important credit market friction because households participating in the credit market use non-state contingent nominal contracts (NSCNC). We extend previous results in this model by allowing for substantial intra-cohort heterogeneity. The heterogeneity is substantial enough that we can approach measured Gini coefficients for income, financial wealth, and consumption in the U.S. data. 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 further characterize monetary policy in terms of nominal interest rate adjustment.
Keywords: Optimal monetary policy, life cycle economies, heterogeneous households, credit market participation, nominal GDP targeting, non-state contingent nominal contracting, inequality, Gini coefficients
JEL Classification: E4, E5
Suggested Citation: Suggested Citation