Targeting Nominal Income in a Dynamic Model

Abstract

The author analyzes the choice of monetary policy rule in a perfect-foresight-planning model. Maximizing agents plan their lifetime consumption decisions in the face of two rigidities. First, households hold money to aid trade. Second, today's price level is inherited from past contracting decisions so that changes in nominal aggregate demand fall on output in the short run. Given these rigidities, the central bank can set real balances in the short run and the author compares two mu = percent rules. His theoretical results suggest that the choice between fixed-money-growth and fixed-nominal-income-growth rules is an empirical assessment that depends on the distribution of shocks to the economy. Copyright 1990 by Ohio State University Press.

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