NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Nominal Income Targeting in an Open-Economy Optimizing Model

Bennett T. McCallum, Edward Nelson

NBER Working Paper No. 6675 (Also Reprint No. r2272)
Issued in June 2000
NBER Program(s):   EFG   ME

This paper presents stochastic simulation results pertaining to the performance of nominal income targeting, here represented as a monetary policy rule that sets quarterly values of an interest rate instrument in response to deviations on existing studies of nominal income growth from a specified target rate. It attempts to improve on existing studies by conducting analysis in a macroeconomic model that is designed to respect both neoclassical theory and empirical regularities. Accordingly, the basic theoretical framework is one in which individual economic agents are depicted as solving dynamic optimization problems with rational expectations, but in an environment such that prices respond only gradually to changes in conditions. The adjustment specification used is the P-bar model, which satisfies the strict natural rate hypothesis. Two improvements over previous work by the authors are that consumption choices reflect habit formation, which lends some inertia to the system, while the modeled economy is open to international flows of goods and securities. Both of these features have major effects on the system's properties. Quantitatively, the model is calibrated to post-Bretton Woods U.S. quarterly data. The results suggest that nominal income targeting deserves serious consideration as a monetary policy strategy.

download in pdf format
   (1534 K)

email paper

This paper is available as PDF (1534 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Published: Journal of Monetary Economics, vol43, no. 3, 1999, pp 553-578.

Users who downloaded this paper also downloaded these:
McCallum w6291 The Alleged Instability of Nominal Income Targeting
McCallum and Nelson w8175 Monetary Policy for an Open Economy: An Alternative Framework with Optimizing Agents and Sticky Prices
Hall and Mankiw w4439 Nominal Income Targeting
Hall and Mankiw Nominal Income Targeting
Feldstein and Stock The Use of a Monetary Aggregate to Target Nominal GDP
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us