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The alleged instability of nominal income targeting

By  and Bennett T. MccallumJel No and Bennett T. Mccallum


Recently it has been argued that a monetary policy of nominal income targeting would result in dynamically unstable processes for output and inflation. That result holds in a theoretical model that includes backwardlooking IS and Phillips curve relations, but these are rather special and theoretically unattractive. The present paper demonstrates that replacement of the special Phillips curve with one of several more plausible specifications overturns the instability result, whether or not the IS equation is replaced with a forward-looking version. Thus the instability result is quite fragile and therefore provides almost no basis for a negative judgment regarding nominal income targeting. Much of the work on this paper was conducted during a visit to the Institute for International Economic Studies, Stockholm University. I am indebted to Edward Nelson and especially Lars Svensson for comments on an earlier draft. The views expressed in this paper are those of the author and do not necessarily represent the views of the Reserve Bank of New Zealand

Year: 1997
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