Hostname: page-component-78c5997874-xbtfd Total loading time: 0 Render date: 2024-11-10T17:21:34.930Z Has data issue: false hasContentIssue false
  • English
  • Français

A NOTE ON NOMINAL GDP TARGETING AND MACROECONOMIC (IN)STABILITY

Published online by Cambridge University Press:  12 March 2018

Shu-Hua Chen
Shu-Hua Chen*
Affiliation:
National Taipei University
*
Address correspondence to: Shu-Hua Chen, Department of Economics, National Taipei University, 151 University Road, San Shia District, New Taipei City 23741, Taiwan; e-mail: shchen@mail.ntpu.edu.tw.
Get access Rights & Permissions [Opens in a new window]

Abstract

Benhabib and Farmer show that in a laissez-faire one-sector real business cycle model under aggregate increasing returns, under sufficiently high degrees of productive externality, the demand-side effect in the labor market triggered by agents' expectations about the economy's future outweighs the supply-side effect, making agents' expectations become self-fulfilling. This paper analytically demonstrates that the conduct of monetary policy under nominal gross domestic product (GDP) targeting reinforces the supply-side effect in the labor market, thereby making belief-driven aggregate fluctuations more difficult to occur. This reinforcement effect on labor supply is absent under nominal consumption targeting and inflation targeting. Hence, under these two monetary regimes, the necessary and sufficient conditions for the economy to display equilibrium indeterminacy and sunspot fluctuations are identical to those in Benhabib and Farmer's laissez-faire economy. The results are robust to an endogenous growth extension of the model, implying that targeting the nominal GDP growth rate is more desirable than targeting the nominal consumption growth rate or the inflation rate in terms of macroeconomic stability.

Keywords

Nominal GDP TargetingInflation TargetingEquilibrium (In)determinacyBusiness Cycles
Type
Notes
Information
Macroeconomic Dynamics , Volume 23 , Issue 8 , December 2019 , pp. 3483 - 3508
Copyright
Copyright © Cambridge University Press 2018 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

The author would like to thank William A. Barnett (Editor) and two anonymous referees for very helpful comments and suggestions which substantially improved the paper.

References

REFERENCES

Basu, Susanto and Fernald, John G. (1997) Returns to scale in U.S. production: Estimates and implications. Journal of Political Economy 105, 249–283.Google Scholar
Bean, Charles R. (1983) Targeting nominal income: An appraisal. Economic Journal 93, 806–819.Google Scholar
Benhabib, Jess and Farmer, Roger E. A. (1994) Indeterminacy and increasing returns. Journal of Economic Theory 63, 19–41.Google Scholar
Benhabib, Jess and Farmer, Roger E. A. (1996) Indeterminacy and sector-specific externalities. Journal of Monetary Economics 37, 421–444.Google Scholar
Billi, Roberto M. (2017) A note on nominal GDP targeting and the zero lower bound. Macroeconomic Dynamics 21, 2138–2157.Google Scholar
Brock, William A. (1974) Money and growth: The case of long-run perfect foresight. International Economic Review 15, 750–77.Google Scholar
Burnside, Craig (1996) Production function regressions, returns to scale, and externalities. Journal of Monetary Economics 37, 177–201.Google Scholar
Carney, Mark (2012) Guidance. Speech Before the CFA Society Toronto. Toronto, Ontario, 11 December.Google Scholar
Clower, Robert (1967) A reconsideration of the microfoundations of monetary theory. Western Economic Journal 6, 1–8.Google Scholar
Farmer, Roger E. A. (1997) Money in a real business cycle model. Journal of Money, Credit and Banking 29, 568–611.Google Scholar
Farmer, Roger E. A. (1999) The Macroeconomics of Self-fulfilling Prophecies, 2nd ed. Cambridge, MA: MIT Press.Google Scholar
Farmer, Roger E. A. and Guo, Jang-Ting (1994) Real business cycles and the animal spirits hypothesis. Journal of Economic Theory 63, 42–72.Google Scholar
Frankel, Jeffrey and Chinn, Menzie (1995) The stabilizing properties of a nominal GNP rule. Journal of Money, Credit and Banking 27, 318–334.Google Scholar
Frankel, Jeffrey (2012) The Death of Inflation Targeting. VoxEU.org, 19 June.Google Scholar
Frankel, Jeffrey (2013) Nominal-GDP targets, without losing the inflation anchor. In Reichlin, Lucrezia and Baldwin, Richard (eds.), Is Inflation Targeting Dead? Central Banking After the Crisis, pp. 90–94. London: Centre for Economic Policy Research.Google Scholar
Garnier, Jean-Philippe, Nishimura, Kazuo and Venditti, Alain (2013) Local indeterminacy in continuous-time models: The role of returns to scale. Macroeconomic Dynamics 17, 326–355.Google Scholar
Hansen, Gary D. (1985) Indivisible labor and the business cycle. Journal of Monetary Economics 16, 309–327.Google Scholar
Harrison, Sharon G. (2001) Indeterminacy in a model with sector-specific externalities. Journal of Economic Dynamics and Control 25, 747–764.Google Scholar
Harrison, Sharon G. and Weder, Mark (2013) Sunspots and credit frictions. Macroeconomic Dynamics 17, 1055–1069.Google Scholar
Lucas, Robert E. Jr. (1980) Equilibrium in a pure currency economy. Economic Inquiry 18, 203–220.Google Scholar
McCallum, Bennett T. (1985) On consequences and criticisms of monetary targeting. Journal of Money, Credit and Banking 17, 570–597.Google Scholar
McCallum, Bennett T. and Nelson, Edward (1999) Nominal income targeting in an open-economy optimizing model. Journal of Monetary Economics 43, 553–578.Google Scholar
Meade, James (1978) The meaning of “internal balance.” Economic Journal 88, 423–435.Google Scholar
Obstfeld, Maurice (1985) The capital inflows problem revisited: A stylized model of southern cone disinflation. Review of Economic Studies 52, 605–625.Google Scholar
Rogerson, Richard (1988) Indivisible labor, lotteries and equilibrium. Journal of Monetary Economics 21, 3–16.Google Scholar
Schmitt-Grohé, Stephanie and Uribe, Martín (1997) Balanced-budget rules, distortionary taxes, and aggregate instability. Journal of Political Economy 105, 976–1000.Google Scholar
Taylor, John B. (1985) What would nominal GNP targeting do to the business cycle? Carnegie-Rochester Conference Series on Public Policy 22, 61–84.Google Scholar
Tobin, James (1983) Monetary policy: Rules, targets and shocks. Journal of Money Credit and Banking 15, 506–518.Google Scholar
Wang, Ping and Yip, Chong K. (1992) Alternative approaches to money and growth. Journal of Money Credit and Banking 24, 553–562.Google Scholar
Weder, Mark (2000) Animal spirits, technology shocks and the business cycle. Journal of Economic Dynamics and Control 24, 273–295.Google Scholar
Wen, Yi (1998) Capacity utilization under increasing returns to scale. Journal of Economic Theory 81, 7–36.Google Scholar
Woodford, Michael (2012) Methods of policy accommodation at the interest-rate lower bound. Presented at the Federal Reserve Bank of Kansas City Symposium on the Changing Policy Landscape, September 2012.Google Scholar
Woodford, Michael (2013) Inflation targeting: Fix it, don't scrap it. In Reichlin, Lucrezia and Baldwin, Richard (eds.), Is Inflation Targeting Dead? Central Banking After the Crisis, pp. 74–89. London: Centre for Economic Policy Research.Google Scholar