Nominal income targeting in an open-economy optimizing model

This paper presents simulation results regarding the performance of nominal income targeting, a monetary policy rule that sets interest rates in response to deviations of nominal GDP growth from a target path. The macroeconomic model is one in which agents solve dynamic optimization problems with ra...

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Bibliographic Details
Published in:Journal of monetary economics 1999-06, Vol.43 (3), p.553-578
Main Authors: McCallum, Bennett T., Nelson, Edward
Format: Article
Language:English
Subjects:
Economic models
Interest rates
Monetary economics
Monetary policy
Nominal income targeting
Open economies
Open economy
Optimization
Optimizing model
Policy analysis
Policy rules
Rational expectations
Simulation
Simulations
Studies
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Summary:This paper presents simulation results regarding the performance of nominal income targeting, a monetary policy rule that sets interest rates in response to deviations of nominal GDP growth from a target path. The macroeconomic model is one in which agents solve dynamic optimization problems with rational expectations, but in an environment with slow price adjustments. In the present version, consumption choices reflect habit formation and the economy is open to international flows of goods and securities. When calibrated to quarterly US data, the model's results suggest that nominal income targeting performs well, in relation to inflation targeting and Taylor rules.
ISSN:0304-3932
1873-1295
DOI:10.1016/S0304-3932(99)00005-7