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  3. American Economic Review
  4. September 2002
  5. Targeting Nominal Income Growth or Inflation?

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Targeting Nominal Income Growth or Inflation?

  • Henrik Jensen
American Economic Review
vol. 92, no. 4, September 2002
(pp. 928–956)
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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 policy making, 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. (JEL E42, E52, F58)

Citation

Jensen, Henrik. 2002. "Targeting Nominal Income Growth or Inflation? ." American Economic Review 92 (4): 928–956. DOI: 10.1257/00028280260344533

JEL Classification

  • E52 Monetary Policy
  • E23 Macroeconomics: Production
  • E31 Price Level; Inflation; Deflation