June, 2015
Suboptimal Equilibria from Nominal GDP Targeting
Thomas L. Hogan
William J. Luther
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To speak with a scholar or learn more on this topic, visit our contact page.We use a simple model to illustrate that nominal GDP targeting might produce a suboptimal equilibrium if there is a growth-maximizing rate of inflation. Following a shock, we find that targeting nominal GDP may result in lower real GDP growth than the economy could sustainably produce given its long-run potential. Importantly, our argument does not depend on problems with forecasting or implementation. We assume the monetary authority has no trouble hitting its nominal GDP target. So long as a growth-maximizing rate of inflation exists, the suboptimal outcome results under the best-case scenario where the rule is followed.
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