Inflation Expectations and the Stability Properties of Nominal GDP Targeting

Richard Dennis

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Monetary Policy and Economic Impact Economic Theory and Policy Economic theories and models

Abstract

Ball (1999) uses a small closed economy model to show that nominal GDP targeting can lead to instability. This paper extends Ball's model to uncover the role inflation expectations play in generating this instability. Allowing inflation expectations to be formed by the more general mixed expectations process, which encompasses Ball's model, we show that nominal GDP targeting is unlikely to lead to instability. We further show that in Ball's model where exact targeting causes instability that moving to inexact targeting restores stability.

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References

1993Discretion versus policy rules in practice 1980Aggregate Dynamics and Staggered Contracts 1998Monetary policy rules in practice 1997Inflation forecast targeting: Implementing and monitoring inflation targets 2000Open-Economy Inflation Targeting 1995New Keynesian Economics and the Phillips Curve 1997The (Un)Importance of Forward-Looking Behavior in Price Specifications 1997Is inflation sticky?

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2011Real-Time Model Uncertainty in the United States: 'Robust' Policies Put to the Test 2020Nominal GDP targeting, real economic activity and inflation stabilization in a new Keynesian framework 2012All in the family: the close connection between nominal-GDP targeting and the Taylor Rule 2001Institutional Arrangements for Monetary Policy When Output Is Persistent

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