Abstract

Should West Germany's Bundesbank Pursue A GNP Regulating Policy?

This paper discusses a proposal that has attracted great attention, internationally, in recent years. It suggests that the nominal Gross National Product (GNP) or its growth rate should be targeted and stabilized by means of adjusting money supply. The introductory is followed in Part II by a comparison of the nominal GNP rule with the Friedman rule within the framework of a simple stochastic macroeconomic equilibrium model of a closed economy with rational expectations. It turns out that a nominal GNP rule is superior to a Friedman rule when the elasticity ofthe demand for goods is in excess of one in relation to real money supply. Part III discusses how much this result changes in the event of any alteration of the structure of the model. This paper sets out on the basis of more recent studies to what extent results are modified by considerations pertaining to inflationary expectations, longer-term shocks, varied information assumptions as well as delayed effects of internal monetary policy in particular. Part IV presents and analyzes arguments and counterarguments according to which the adoption of a nominal GNP rule reduces the risk of stagflation by alledgedly favouring cooperative approaches. Part V examines whether the stabilization of expectations a regulating policy is hoped to bring about is compatible with the inclusion, favoured by most protagonists of a nominal GNP rule, of discretionary deviations in the event of unforeseen contingencies. Such an inclusion is often rejected today with reference to the theory of the “dynamic inconsistency” of policy. The centre-piece of this theory is described in Part V, whilst Part VI develops the concept of a trade-off between credibility and flexibility. Part VII gives a summary.