Working Paper: NBER ID: w1835
Authors: Kenneth D. West
Abstract: This paper compares nominal income and monetary targets in a standard aggregate demand - aggregate supply framework. If the desirability of policies is measured by their effect on the unconditional variance of output, nominal income targeting is preferable if and only if the aggregate elasticity of demand for real balances is greater than one. This is precisely the opposite of the condition that in Bean (1984) is sufficient to make nominal income targeting preferable.This points out the importance of specification of supply and of objective function in work on nominal income targeting.
Keywords: nominal income targeting; monetary policy; output variance
JEL Codes: E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| elasticity of demand for real balances > 1 (E41) | nominal income targeting is preferable to money supply targeting (E61) |
| nominal income targeting (E64) | lower output variance (C29) |
| elasticity of demand for real balances > 1 (E41) | nominal income targeting leads to lower output variance (E19) |