Alternative Monetary Policy Rules and the Specification of the Phillips Curve: A Comparison of Nominal Income with Strict Inflation Targeting
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Alternative Monetary Policy Rules and the Specification of the Phillips Curve: A Comparison of Nominal Income with Strict Inflation Targeting
Credit and Capital Markets – Kredit und Kapital, Vol. 34 (2001), Iss. 4 : pp. 526–553
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Alfred V. Guender, Christchurch/New Zealand
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Abstract
Alternative Monetary Policy Rules and the Specification of the Phillips Curve: A Comparison of Nominal Income with Strict Inflation Targeting
This paper shows that the instability of nominal income targeting in a simple backward-looking macro model disappears if the policymaker chooses to adopt a hybrid nominal income target, which is a special case of the optimal monetary policy. This form of nominal income targeting is compared to another form of optimal monetary policy, strict inflation targeting, so as to establish the conditions under which the former strategy is preferable to the latter. For most coefficient estimates reported in the literature hybrid nominal income targeting is likely to dominate strict inflation targeting as a strategy of monetary policy. We also analyze the two strategies of monetary policy using a forward-looking specification as our baseline model. In contrast to the policy frontier based on the backward-looking model, this policy frontier is not U-shaped; instead it implies a monotonic trade-off between the relevant parameters. In this model the strict inflation target becomes more attractive relative to the hybrid nominal income target as the Phillips Curve parameter increases in size. A strict inflation target is more likely to dominate a nominal income growth rate target than a hybrid nominal income target for certain values of the Phillips Curve parameter. (JEL E5)