Nominal GDP targeting for a speedier economic recovery

Eagle, David M. (2012): Nominal GDP targeting for a speedier economic recovery.

Abstract

For U.S. recessions since 1948, we study paneled time series of (i) ExUR, the excess of the unemployment rate over the prerecession rate, and (ii) NGAP, the percent deviation of nominal GDP from its prerecession trend. Excluding the 1969-70 and 1973-75 recessions, a regression of ExUR on current and past values of NGAP has an R2 of 75%. Simulations indicate that NGDP targeting could have eliminated 84% of the average ExUR during the period from 1.5 years and 4 years after the recessions began. The maximum effect of NGAP on unemployment occurs with a lag of 2 to 3 quarters.

• Item Type: MPRA Paper
• Language: English
• Keywords: nominal GDP targeting, unemployment, recessions, business cycle
• Subjects: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E24 - Employment ; Unemployment ; Wages ; Intergenerational Income Distribution ; Aggregate Human Capital ; Aggregate Labor Productivity; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit

References

Altavilla, C. and Ciccarelli, M. (2009). “The Effects Of Monetary Policy On Unemployment Dynamics Under Model Uncertainty Evidence From The Us And The Euro Area,” ECB Working Paper No. 1089. Available at SSRN: http://ssrn.com/abstract=1467788

Ambler, Steve (September 2009). “Price-Level Targeting and Stabilization Policy: A Review” Bank of Canada Review.

Meade, J. E. (I978). “The meaning of internal balance”. Economic Journal, 88:423-35, http://www.nobelprize.org/nobel_prizes/economics/laureates/1977/meade-lecture.html

Tobin, J. (1980). “Stabilization policy ten years after”. Brookings Papers on Economic Activity, vol. I, pp. 19-72, http://www.jstor.org/stable/2534285, retrieved on March 8, 2012.

Brittan, S. (1981). “How to End the Monetarist Controversy,” Hobart Paper # 90 London: Institute of Economic Affairs

Bean, Charles R. (1983), “Targeting Nominal Income: An Appraisal,” The Economic Journal , 93(#372):806-819, http://www.jstor.org/stable/2232747, retrieved on March 7, 2012.

Batini, N. and Nelson, E. (2002). “The Lag from Monetary Policy Actions to Inflation: Friedman Revisited,” Bank of England External MPC Unit Discussion Paper No. 6, http://www.google.com/url?sa=t&rct=j&q=the%20lag%20from%20monetary%20policy%20actions%20to%20inflation%3A%20friedman%20revisited&source=web&cd=1&ved=0CCUQFjAA&url=http%3A%2F%2Fwww.bankofengland.co.uk%2Fpublications%2Fexternalmpcpapers%2Fextmpcpaper0006.pdf&ei=-u5WT-KkAemM2gWFsMnmCQ&usg=AFQjCNFNdcUOrj1FA9EpccGHC7RXodu7Vg retrieved March 6, 2012

Coletti, D.; Lalonde, R.; and Muir D. (2008). “Inflation Targeting and Price-Level-Path Targeting in the Global Economy Model: Some Open Economy Considerations,”, IMF Staff Papers, vol 55, #2

Domac, I. and Kandil, M. (2002). “On the performance and practicality of nominal GDP targeting in Germany,” Journal of Economic Studies 29(#3):179-204.

Friedman, Milton, "Monetary Policy for the 1980s," In J. H. Moore, ed., To Promote Prosperity (Stanford: Hoover Institution Press, 1984).

Frisch, H. and Staudinger, S. (2000). “INFLATION TARGETING VERSUS NOMINAL INCOME TARGETING,” CESifo Working Paper No. 301, http://www.cesifo-group.de/portal/pls/portal/docs/1/1191022.PDF

Hall, Robert E., "Monetary Policy for Noninflationary Growth," in J. H. Moore, ed., To Promote Prosperity (Stanford: Hoover Institution Press, 1984).

Hall, R. & Mankiw, N. G., 1994. "Nominal Income Targeting," NBER Chapters, in: Monetary Policy, pages 71-94 National Bureau of Economic Research, Inc.

Kahn, George A., 2009. “Beyond Inflation Targeting: Should Central Banks Target the Price Level?”.Federal Reserve Bank of Kansas City Economic Review, http://www.kansascityfed.org/PUBLICAT/ECONREV/pdf/09q3kahn.pdf.

Malik, Hamza, 2005. "Price Level vs. Nominal Income Targeting: Aggregate Demand Shocks and the Cost Channel of Monetary Policy Transmission," MPRA Paper 456, University Library of Munich, Germany, revised Aug 2006.

Mankiw, Greg (July 13, 2006), “Taylor on Inflation Targeting,” Greg Mankiw’s Blog, http://gregmankiw.blogspot.com/2006/07/taylor-on-inflation-targeting.html

McCallum, Bennett T. 1997. "The Alleged Instability of Nominal Income Targeting," NBER Working Papers 6291, National Bureau of Economic Research, Inc.

McCallum, B.. & Nelson, E., 1999. "Nominal income targeting in an open-economy optimizing model," Journal of Monetary Economics, Elsevier, vol. 43(103), pages 553-578, June

McCallum, Bennett T. (2011). “Nominal GDP Targeting,” http://shadowfed.org/wp-content/uploads/2011/10/McCallum-SOMCOct2011.pdf, retrieved on March 7, 2012.

Meh, C. A.; Ríos-Rull, J.-V.; and Terajima. Y. (2008). “Aggregate and Welfare Effects of Redistribution of Wealth under Inflation and Price-Level Targeting.” Bank of Canada Working Paper No. 2008-31.

Pearce, David (1986) The MIT Dictionary of Modern Economics, Cambridge, MA., MIT Press,

Reichel, Richard (2004). “On The Death Of The Phillips Curve: Further Evidence” Cato Journal, 24(#3):341-348.

Sumner, Scott (2011a). “Retargeting the Fed,” National Affairs (#9) Fall, http://www.nationalaffairs.com/publications/detail/re-targeting-the-fed, access December 28, 2011.

________________, (2011b). The Case for NGDP Targeting -Lessons from the Great Recession, (Adam Smith Institute, Grosvenor Group (Print Services) Limited, London), http://www.adamsmith.org/sites/default/files/resources/ASI_NGDP_WEB.pdf

Svensson, Lars E. O. (1996). “Price Level Targeting vs. Inflation Targeting: A Free Lunch?" NBER Working Paper 5719

Taylor, John B. 2006. “Don’t Talk the Talk.” Wall Street Journal (Eastern edition). New York, N.Y.: Jul 13, 2006. p. A.8