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Summer 2020
ISSN 0890-913X
Volume 35, Number 2

Suboptimal Equilibria from Nominal GDP Targeting

Thomas L. Hogan, Rice University
William J. Luther, Florida Atlantic Univeristy
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/index.php?action=ajax&rs=GDMgetPage&rsargs[]=2020 Journal of Private Enterprise Vol 35 No 2 Summer parte4.pdf&rsargs[]=0
TheJournalofPrivateEnterprise35(2),2020,6176SuboptimalEquilibriafromNominalGDPTargetingThomasL.HoganRiceUniversityWilliamJ.LutherFloridaAtlanticUniversity______________________________________________________AbstractWeuseasimplemodeltoillustratethatnominalGDPtargetingmightproduceasuboptimalequilibriumifthereisagrowthmaximizingrateofinflation.Followingashock,wefindthattargetingnominalGDPmightresultinlowerrealGDPgrowththantheeconomycouldsustainablyproducegivenitslong-runpotential.Ourargumentdoesnotdependonproblemswithforecastingorimplementation.WeassumethemonetaryauthorityhasnotroublehittingitsnominalGDPtarget.Solongasagrowth-maximizingrateofinflationexists,thesuboptimaloutcomeresultswhentheruleisfollowed.______________________________________________________JELCodes:E42,E52,E41,E31Keywords:monetarypolicy,nominalGDPtargeting;inflation,economicgrowthI.IntroductionIntheaftermathoftheGreatRecessionof20072009,economistshaverevivedolddebatesovertheproperroleoftheFederalReserveandwhethermonetarypolicyshouldbebasedonrulesordiscretion.OnepopularproposalisthattheFedshouldcommittostabilizingthepathoftotalnominalspending.1Ratherthanattemptingtoinfluenceeconomicactivitybytargetingshort-runinterestratesorinflation,theFedwouldinsteadmanagethemoneysupplysothatnominalGDPgrowsatsomeprescribedrate,regardlessofwhether1NominalGDPtargetingmaybeundertakenbyanymonetaryauthoritysuchasacentralbank,currencyboard,orevenaprivatemoney-creatingentity.See,forexample,SalterandYoung(2018).Assuch,wewillusethetermmonetaryauthorityinwhatfollows.
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