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A simple empirical investigation into the optimal size of the NGDP Target and Level targeting

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Abstract

This paper constructs an index to study two questions within a growing school of macroeconomic thought, Market Monetarism. This school argues that the central bank has full control over all nominal variables in the economy and is solely responsible for aggregate demand management. To manage aggregate demand, Market Monetarism argues the central bank should target Nominal GDP. We address two issues of contention. First, we measure the optimal size of the optimal NGDP target. Second, we measure the extent to which central banks should engage in level targeting, i.e., whether central banks should correct for past errors when hitting their targets. We find evidence consistent with a five percent target but are unable to find consistent evidence regarding level targeting.

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Notes

  1. See Frankel (2012) for a literature review.

  2. See Selgin (1997) for a similar, though not identical target. See White (1999) for a summary of Hayek’s perspectives on monetary policy.

  3. For arguments to this effect, see Ball (2014) and Krugman (2014).

  4. Each weight, bounded by zero and one, is:

    $$ \raisebox{1ex}{$\frac{1}{{\left(1+\alpha \right)}^i}$}\!\left/ \!\raisebox{-1ex}{$\sum_{i=0}^S\frac{1}{{\left(1+\alpha \right)}^i}$}\right. $$
  5. Included in Table 6 and subsequent tables are results regarding the slope coefficients. These are included to allow for a complete picture of the modeling results, but comparisons across countries are not readily apparent, as the variation amongst them is driven largely by the variation in the K and α parameters.

  6. This was done for all alphas calculated to be 10.0 or greater.

  7. In some ways this is to ensure the index is robust against the concerns of Di Tella et al. (2001))

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Acknowledgments

The authors thank Andrew Young, Daniel Kuehn, Nicolas Cachanosky, and Colin O’Reilly for their helpful comments. We also thank the participants at the conference, “Should Central Banks Target NGDP?” at the Center for Free Enterprise at West Virginia University, where this paper was presented. Any remaining errors are solely our own.

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Correspondence to Ryan H. Murphy.

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Murphy, R.H., Chen, J. A simple empirical investigation into the optimal size of the NGDP Target and Level targeting. J Econ Finan 41, 354–369 (2017). https://doi.org/10.1007/s12197-016-9357-7

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  • DOI: https://doi.org/10.1007/s12197-016-9357-7

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