Abstract
We compare optimal and simple interest-rate rules. Our model features optimizing agents, monopolistic competition in both product and labor markets, and one-period nominal contracts (for wages alone or for both wages and prices) signed before shocks are known. Exact solutions ensure that we obtain correct welfare rankings. Optimal rules maximize the unconditional expected utility of the representative agent with commitment subject to the information set of the policymaker. Even with monopolistic distortions, the optimal full-information rule makes the economy mimic the hypothetical full-flexibility equilibrium. Strict versions of inflation targeting, nominal-income-growth targeting, and other such simple rules are suboptimal under both full and partial information but flexible versions are optimal under certain partial-information assumptions. Nominal-income-growth targeting dominates inflation targeting for plausible parameter values.
| Original language | English |
|---|---|
| Pages (from-to) | 1463-1495 |
| Number of pages | 33 |
| Journal | Journal of Monetary Economics |
| Volume | 52 |
| Issue number | 8 |
| DOIs | |
| Publication status | Published - 2005 Nov 1 |
| Externally published | Yes |
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Keywords
- Inflation targeting
- Interest-rate rule
- Nominal-income-growth targeting
- Optimal monetary policy
- Wage and price contracts
ASJC Scopus subject areas
- Economics and Econometrics
- Finance
Cite this
Inflation targeting and nominal-income-growth targeting : When and why are they suboptimal? / Kim, Jinill; Henderson, Dale W.
In: Journal of Monetary Economics, Vol. 52, No. 8, 01.11.2005, p. 1463-1495.Research output: Contribution to journal › Article
}
TY - JOUR
T1 - Inflation targeting and nominal-income-growth targeting
T2 - When and why are they suboptimal?
AU - Kim, Jinill
AU - Henderson, Dale W.
PY - 2005/11/1
Y1 - 2005/11/1
N2 - We compare optimal and simple interest-rate rules. Our model features optimizing agents, monopolistic competition in both product and labor markets, and one-period nominal contracts (for wages alone or for both wages and prices) signed before shocks are known. Exact solutions ensure that we obtain correct welfare rankings. Optimal rules maximize the unconditional expected utility of the representative agent with commitment subject to the information set of the policymaker. Even with monopolistic distortions, the optimal full-information rule makes the economy mimic the hypothetical full-flexibility equilibrium. Strict versions of inflation targeting, nominal-income-growth targeting, and other such simple rules are suboptimal under both full and partial information but flexible versions are optimal under certain partial-information assumptions. Nominal-income-growth targeting dominates inflation targeting for plausible parameter values.
AB - We compare optimal and simple interest-rate rules. Our model features optimizing agents, monopolistic competition in both product and labor markets, and one-period nominal contracts (for wages alone or for both wages and prices) signed before shocks are known. Exact solutions ensure that we obtain correct welfare rankings. Optimal rules maximize the unconditional expected utility of the representative agent with commitment subject to the information set of the policymaker. Even with monopolistic distortions, the optimal full-information rule makes the economy mimic the hypothetical full-flexibility equilibrium. Strict versions of inflation targeting, nominal-income-growth targeting, and other such simple rules are suboptimal under both full and partial information but flexible versions are optimal under certain partial-information assumptions. Nominal-income-growth targeting dominates inflation targeting for plausible parameter values.
KW - Inflation targeting
KW - Interest-rate rule
KW - Nominal-income-growth targeting
KW - Optimal monetary policy
KW - Wage and price contracts
UR - http://www.scopus.com/inward/record.url?scp=29444451054&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=29444451054&partnerID=8YFLogxK
U2 - 10.1016/j.jmoneco.2004.08.010
DO - 10.1016/j.jmoneco.2004.08.010
M3 - Article
VL - 52
SP - 1463
EP - 1495
JO - Journal of Monetary Economics
JF - Journal of Monetary Economics
SN - 0304-3932
IS - 8
ER -