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- Title
TARGETING NOMINAL INCOME: AN APPRAISAL.
- Authors
Bean, Charles R.
- Abstract
In this paper we examine the implications of such a proposal for the performance of the economy in the context of a simple stochastic macroeconomic model under rational expectations. A contracting framework is adopted in which the wage is fixed in a state of uncertainty about future levels of demand and productivity. The objective of the authorities is to minimise the divergence of output from its full information equilibrium level. If labour supply is inelastic then it turns out that maintaining the level of nominal income is actually the optimal policy. If labour supply is elastic nominal income targetry provides an optimal response to demand (IS/LM) shocks but a suboptimal response to productivity shocks. However, a sufficient condition for a nominal income target to be preferable to a fixed money supply target is that the price elasticity of aggregate demand be less than unity. The paper concludes by examining the implications of pursuing target growth rates rather than levels. In the previous section we have demonstrated -- in the context of a particular model of supply behaviour -- that a policy of targeting nominal income produces an optimal response to demand shocks and to productivity shocks if labour supply is inelastic. Even if labour supply is elastic nominal income targets will still produce a better response to productivity shocks than monetary targets if the price elasticity of aggregate demand is less than unity. Growth rules are less attractive than targets for the level of nominal income but again will still be preferable to monetary targets if there are no transitory shocks and the price elasticity of aggregate demand is less than unity. Finally, there is the question of the role of fiscal policy in managing the level of nominal income. Meade himself has suggested that fiscal policy rather than monetary policy might be charged with the prime responsibility for this (see Meade (1981) and Meade and Vines (1983)). This is a large subject wh...
- Publication
Economic Journal, 1983, Vol 93, Issue 372, p806
- ISSN
0013-0133
- Publication type
Academic Journal
- DOI
10.2307/2232747