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A fiscal perspective on nominal GDP targeting
Author(s) -
AboZaid Salem,
Chen Huiying,
Kamara Ahmed
Publication year - 2021
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/ecin.13016
Subject(s) - economics , monetary policy , taylor rule , inflation targeting , fiscal policy , gross domestic product , macroeconomics , real gross domestic product , nominal interest rate , inflation (cosmology) , monetary economics , keynesian economics , real interest rate , central bank , physics , theoretical physics
Abstract This paper studies fiscal policy in a model with nominal gross domestic product (GDP) targeting. We find that, with wage rigidity, nominal GDP targeting generates lower welfare losses than inflation targeting and a Taylor rule. On the other hand, adopting this regime makes standard fiscal policy rules, whereby distortionary tax rates are designed to respond to economic activity, dependent on the behavior of inflation instead. We also find that the fiscal multipliers with nominal GDP targeting are smaller than the multipliers under inflation targeting and the Taylor rule. Therefore, nominal GDP targeting does not necessarily outperform other monetary policy rules.