Nominal GDP Targeting for Developing Countries

Pranjul Bhandari, Jeffrey A. Frankel

NBER Working Paper No. 20898
Issued in January 2015
NBER Program(s):Economic Fluctuations and Growth, International Finance and Macroeconomics, Monetary Economics

The revival of interest in nominal GDP (NGDP) targeting has come in the context of large advanced economies. We consider the case for NGDP targeting for mid-sized developing countries, in light of their susceptibility to supply shocks and terms of trade shocks. For India, in particular, one major exogenous supply shock is the monsoon rains. NGDP targeting splits the impact of supply shocks automatically between inflation and real GDP growth. In the case of annual inflation targeting (IT), by contrast, the full impact of an adverse supply shock or terms of trade shock is felt as a loss in real GDP alone. NGDP targeting automatically accommodates supply shocks as most central banks with discretion would do anyway, while retaining the advantage of anchoring expectations as rules are designed to do. We outline a simple theoretical model and derive the condition under which an NGDP targeting regime would dominate other regimes such as annual IT for achieving objectives of output and price stability. We go on to estimate for the case of India the parameters needed to ascertain whether the condition holds, particularly the slope of the aggregate supply curve. Estimates suggest that the condition may indeed hold.

download in pdf format
   (1481 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w20898

Published: Pranjul Bhandari & Jeffrey Frankel, 2017. "Nominal GDP targeting for developing countries," Research in Economics, vol 71(3), pages 491-506. citation courtesy of

Users who downloaded this paper also downloaded* these:
Sachs, Benzell, and LaGarda w21091 Robots: Curse or Blessing? A Basic Framework
Boehm and House w20237 Optimal Taylor Rules in New Keynesian Models
Edwards w20893 Monetary Policy Independence under Flexible Exchange Rates: An Illusion?
Bhattarai, Eggertsson, and Schoenle w19886 Is Increased Price Flexibility Stabilizing? Redux
Hausman and Kellogg w21115 Welfare and Distributional Implications of Shale Gas
NBER Videos

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

Contact Us