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Summer 2020

ISSN 0890-913X

Volume 35, Number 2

Categories: Summer 2020 | Monetary policy

Suboptimal Equilibria from Nominal GDP Targeting

Thomas L. Hogan, Rice University

William J. Luther, Florida Atlantic Univeristy

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TheJournalofPrivateEnterprise35(2),2020,61–76SuboptimalEquilibriafromNominalGDPTargetingThomasL.HoganRiceUniversityWilliamJ.LutherFloridaAtlanticUniversity______________________________________________________AbstractWeuseasimplemodeltoillustratethatnominalGDPtargetingmightproduceasuboptimalequilibriumifthereisagrowthmaximizingrateofinflation.Followingashock,wefindthattargetingnominalGDPmightresultinlowerrealGDPgrowththantheeconomycouldsustainablyproducegivenitslong-runpotential.Ourargumentdoesnotdependonproblemswithforecastingorimplementation.WeassumethemonetaryauthorityhasnotroublehittingitsnominalGDPtarget.Solongasagrowth-maximizingrateofinflationexists,thesuboptimaloutcomeresultswhentheruleisfollowed.______________________________________________________JELCodes:E42,E52,E41,E31Keywords:monetarypolicy,nominalGDPtargeting;inflation,economicgrowthI.IntroductionIntheaftermathoftheGreatRecessionof2007–2009,economistshaverevivedolddebatesovertheproperroleoftheFederalReserveandwhethermonetarypolicyshouldbebasedonrulesordiscretion.OnepopularproposalisthattheFedshouldcommittostabilizingthepathoftotalnominalspending.1Ratherthanattemptingtoinfluenceeconomicactivitybytargetingshort-runinterestratesorinflation,theFedwouldinsteadmanagethemoneysupplysothatnominalGDPgrowsatsomeprescribedrate,regardlessofwhether1NominalGDPtargetingmaybeundertakenbyanymonetaryauthoritysuchasacentralbank,currencyboard,orevenaprivatemoney-creatingentity.See,forexample,SalterandYoung(2018).Assuch,wewillusetheterm“monetaryauthority”inwhatfollows.

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Metadata [hide]

Title	Suboptimal Equilibria from Nominal GDP Targeting
Authors/Creators:	Thomas L. Hogan, Rice University William J. Luther, Florida Atlantic Univeristy
Year:	2020
Volume:	35
Number:	2
Pages:	61 - 76
Publisher:	The Association of Private Enterprise Education
ISSN:	0890-913X
Document Type:	Articles
Keywords:	monetary policy, nominal GDP targeting; inflation, economic growth

Citation:
Hogan, Thomas L.; Luther, William J. / 2020. "Suboptimal Equilibria from Nominal GDP Targeting." The Journal of Private Enterprise, 35(2): 61-76.