Inflation targeting and nominal-income-growth targeting: When and why are they suboptimal?

Jinill Kim, Dale W. Henderson

Research output: Contribution to journalArticle

19 Citations (Scopus)

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 languageEnglish
Pages (from-to)1463-1495
Number of pages33
JournalJournal of Monetary Economics
Volume52
Issue number8
DOIs
Publication statusPublished - 2005 Nov

Keywords

  • Inflation targeting
  • Interest-rate rule
  • Nominal-income-growth targeting
  • Optimal monetary policy
  • Wage and price contracts

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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