Targeting Nominal Income Growth or Inflation?

Henrik Jensen, University of Copenhagen, CEPR and EPRU

American Economic Review 92 (2002), 928-956.

Abstract

Within a simple New Keynesian model emphasizing forward-looking behavior of private agents, I evaluate optimal nominal income growth targeting versus optimal inflation targeting. When the economy is mainly subject to shocks that do not involve monetary policy trade-offs for society, inflation targeting is preferable. Otherwise, nominal income growth targeting may be superior because it induces inertial policymaking, which improves the inflation-output gap trade-off. Somewhat paradoxically, inflation targeting may be relatively less favorable the more society dislikes inflation, and the more persistent are the effects of inflation-generating shocks.
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