Working Paper: NBER ID: w21420
Authors: Julio Garn; Robert Lester; Eric Sims
Abstract: This paper evaluates the welfare properties of nominal GDP targeting in the context of a New Keynesian model with both price and wage rigidity. In particular, we compare nominal GDP targeting to inflation and output gap targeting as well as to a conventional Taylor rule. These comparisons are made on the basis of welfare losses relative to a hypothetical equilibrium with flexible prices and wages. Output gap targeting is the most desirable of the rules under consideration, but nominal GDP targeting performs almost as well. Nominal GDP targeting is associated with smaller welfare losses than a Taylor rule and significantly outperforms inflation targeting. Relative to inflation targeting and a Taylor rule, nominal GDP targeting performs best conditional on supply shocks and when wages are sticky relative to prices. Nominal GDP targeting may outperform output gap targeting if the gap is observed with noise, and has more desirable properties related to equilibrium determinacy than does gap targeting.
Keywords: Nominal GDP Targeting; Monetary Policy; New Keynesian Model
JEL Codes: E31; E47; E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| nominal GDP targeting (E19) | smaller welfare losses (D69) |
| nominal GDP targeting (E19) | better welfare outcomes (I30) |
| nominal GDP targeting (E19) | smaller welfare losses than Taylor rule (D69) |
| nominal GDP targeting (E19) | better welfare outcomes than inflation targeting (D69) |
| nominal GDP targeting (E19) | outperforms output gap targeting if output gap is observed with noise (E61) |