Welfare implications of nomimal GDP targeting in a small open economy

Ortiz, Marco and Inca, Arthur and Solf, Fabrizio (2024): Welfare implications of nomimal GDP targeting in a small open economy.

Abstract

Nominal GDP targeting (NGDP) rules have gained attention as a potential alternative to traditional models of monetary policy. In this paper, we extend the analysis of the welfare implications of NGDP rules within a New Keynesian model with nominal price and wage rigidities. Using a welfare function derived from the utility of consumers, we compare the NGDP target with a domestic inflation target, a CPI inflation target, and a Taylor rule in a small open economy scenario. Our simulations reveal that NGDP rules confer advantages on a central bank when the economy faces supply shocks, while their performance against demand shocks is comparable to that of a CPI target rule. These findings suggest that NGDP targeting could be a useful policy framework for central banks seeking to enhance their ability to stabilize the economy.

• Item Type: MPRA Paper
• Language: English
• Keywords: Nominal GDP targeting, optimal monetary policy, General equilibrium, open economy macroeconomics.
• Subjects: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics

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