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Fall 2019
ISSN 0890-915X
Volume 34, Number 3

Expectations and NGDP Targeting: Supply-Side Problems with Demand-Side Policy

Alexander William Salter, Texas Tech University
Thomas L. Hogan, Rice University
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TheJournalofPrivateEnterprise34(3),2019,89106ExpectationsandNGDPTargeting:Supply-SideProblemswithDemand-SidePolicyAlexanderWilliamSalterTexasTechUniversityThomasL.HoganRiceUniversity______________________________________________________AbstractThispaperconsiderstheeffectsofchangingexpectationsundermacroeconomicpoliciesthatrelyontargetingnominalvariables,suchasNGDPtargeting.Theseproposals,inlinewithadynamicconceptionoftheequationofexchange,arguethatthemonetaryauthoritycanachieveanydynamicmonetaryequilibrium,providedfavorablepublicexpectations.Theproblemofchangingpublicexpectations,however,cannotbeassumedaway.Becausethepublicmayonlyfindasubsetofdynamicmonetaryequilibriaattainable,attemptstocoordinatearoundanequilibriumperceivedtobeunobtainablecanhaveunintendedconsequences.WedemonstrateinaNewKeynesianmodelthatdemand-sidestabilizationpolicycanshiftinflationexpectations,resultinginsupply-sidedifficulties.Thisproblemservesasawarningagainstdemand-sidefundamentalisminmacroeconomicpolicy.______________________________________________________JELCodes:E32,E52,E58,E66Keywords:aggregatedemandstabilization,expectations,monetaryequilibrium,monetarypolicy,NGDPtargeting,stagflation,supplysideI.IntroductionTheaftermathoftheGreatRecessionhasrevivedthedebateovermacroeconomicstabilityandmonetarypolicy.Someeconomists,suchasJohnTaylor(2008,2014),believetheFederalReservesmonetarypolicywastooexpansionaryduringthecrisis,whileothers,suchasScottSumner(2012a),believeitwasnotexpansionaryenough.TaylorandSumneragree,however,thatFedpolicywouldbeimprovedbyabandoningdiscretionandadoptingarules-basedmonetarypolicy.OnesuchproposalisthattheFedshouldtargetnominalincome(NGDP)ratherthaninflationandGDPgrowthseparately.Thegoalofstabilizingnominalincomewasrecommended
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