Optimal Monetary Policy for the Masses

37 Pages Posted: 26 Mar 2019 Last revised: 3 Apr 2019

See all articles by James Bullard

James Bullard

Federal Reserve Banks - Federal Reserve Bank of St. Louis

Riccardo DiCecio

Federal Reserve Bank of St. Louis - Research Division

Date Written: 2019-03-22

Abstract

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

Bullard, James and DiCecio, Riccardo, Optimal Monetary Policy for the Masses (2019-03-22). FRB St. Louis Working Paper No. 2019-9, Available at SSRN: https://ssrn.com/abstract=3358613 or http://dx.doi.org/10.20955/wp.2019.009

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)

Riccardo DiCecio

Federal Reserve Bank of St. Louis - Research Division ( email )

411 Locust St
Saint Louis, MO 63011
United States

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