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On the Efficiency of Nominal GDP Targeting in a Large Open Economy

Author

Listed:
  • Matthew Hoelle
  • M. Udara Peiris
Abstract
Since 2007 there have been increasing calls to abandon a regime of Stabilizing Inflation (SI) in favor of Nominal GDP (NGDP) targeting. One argument in favor of NGDP targeting is that it allows inflation to redistribute resources among bond holders efficiently. Here we examine this claim in a large open monetary economy and show that, in contrast to SI, NGDP targeting is in fact (Pareto) efficient in a world with stochastic real uncertainty, and in the absence of complete insurance markets (only nominally risk free bonds are available). However this result is ultimately fragile and breaks down once we attempt to deviate from the simplistic setting necessary for the result to hold.

Suggested Citation

  • Matthew Hoelle & M. Udara Peiris, 2013. "On the Efficiency of Nominal GDP Targeting in a Large Open Economy," Purdue University Economics Working Papers 1273, Purdue University, Department of Economics.
    • Handle: RePEc:pur:prukra:1273
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    File URL: https://business.purdue.edu/research/working-papers-series/2013/1273.pdf
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    References listed on IDEAS

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    Cited by:

    1. Matthew Hoelle, 2014. "Quantitative Easing under Incomplete Markets: Optimality Conditions for Stationary Policy," Purdue University Economics Working Papers 1277, Purdue University, Department of Economics.
    2. Bryane Michael & Svitlana Osaulenko, 2021. "TOWARD A NEW COMPARATIVE PUBLIC LAW OF CENTRAL BANK LEGISLATION: Designing Legislative Mandates for Central Bank Private Securities Assets Purchases and Nominal GDP Targeting," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 10(1), pages 5-38.

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    More about this item

    Keywords

    monetary policy; open economy; uncertainty; incomplete markets; Pareto efficiency.;
    All these keywords.

    JEL classification:

    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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