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

joint with Udara Peiris.

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.

Please cite as:
Hoelle, M., Peiris, M.U. (2013): "On the efficiency of nominal GDP targeting in a large open economy," Krannert Working Paper Series, Paper No. 1273.

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