Hostname: page-component-78c5997874-lj6df Total loading time: 0 Render date: 2024-11-14T11:13:36.108Z Has data issue: false hasContentIssue false

A “WORKING” SOLUTION TO THE QUESTION OF NOMINAL GDP TARGETING

Published online by Cambridge University Press:  24 September 2014

Michael T. Belongia*
Affiliation:
University of Mississippi
Peter N. Ireland
Affiliation:
Boston College
*
Address correspondence to: Michael T. Belongia, Department of Economics, University of Mississippi, Box 1848, University, MS 38677, USA; e-mail: [email protected].

Abstract

Although a number of economists have tried to revive the idea of nominal GDP targeting since the financial crisis of 2008, very little has been said about how this objective might be achieved in practice. This paper adopts and extends a strategy first outlined by Holbrook Working and later employed in the P-Star model. It presents a series of theoretical and empirical results to argue that Divisia monetary aggregates can be controlled by the Federal Reserve and that the trend velocities of these aggregates exhibit the stability required to make long-run targeting of a nominal objective feasible.

Type
Articles
Copyright
Copyright © Cambridge University Press 2014 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Anderson, Richard G. and Jones, Barry E. (2011) A comprehensive revision of the monetary services (Divisia) indexes. Federal Reserve Bank of St. Louis Review 93, 325359.Google Scholar
Barnett, William A. (1978) The user cost of money. Economics Letters 1, 145149. Reprinted in William A. Barnett and Apostolos Serletis, The Theory of Monetary Aggregation, pp. 6–10. Amsterdam: Elsevier, 2012.CrossRefGoogle Scholar
Barnett, William A. (1980) Economic monetary aggregates: An application of index number and aggregation theory. Journal of Econometrics 14, 1148. Reprinted in William Barnett and Apostolos Serletis, The Theory of Monetary Aggregation, pp. 11–48. Amsterdam: Elsevier, 2013.CrossRefGoogle Scholar
Barnett, William A. (1982) The optimal level of monetary aggregation. Journal of Money, Credit and Banking 14, 687710. Reprinted in William Barnett and Apostolos Serletis, The Theory of Monetary Aggregation, pp. 125–149. Amsterdam: Elsevier, 2012.CrossRefGoogle Scholar
Barnett, William A. (2012) Getting It Wrong: How Faulty Monetary Statistics Undermine the Fed, the Financial System, and the Economy. Cambridge, MA: MIT Press.Google Scholar
Barnett, William A. (in press) Friedman and Divisia monetary measures. In Cord, Robert and Hammond, Dan (eds.), Milton Friedman: Contributions to Economics and Public Policy. Oxford, UK: Oxford University Press.Google Scholar
Barnett, William A., Chauvet, Marcelle, and Leon, Danilo Leiva (2014) Real-Time Nowcasting of Nominal GDP. MPRA Paper 53699, University Library of Munich, Germany.Google Scholar
Barnett, William A., Liu, Jia, Mattson, Ryan, and van den Noort, Jeff (2013) The new CFS Divisia monetary aggregates: Design, construction, and data sources. Open Economies Review 24, 101124.CrossRefGoogle Scholar
Bean, Charles R. (1983) Targeting nominal income: An appraisal. Economic Journal 93, 806819.CrossRefGoogle Scholar
Belongia, Michael T. and Ireland, Peter N. (2013). Instability: Monetary and Real. Working paper 830, Department of Economics, Boston College, Chestnut Hill.Google Scholar
Belongia, Michael T. and Ireland, Peter N. (in press) The Barnett critique after three decades: A New Keynesian analysis. Journal of Econometrics.Google Scholar
Chauvet, Marcelle and Potter, Simon (2013) Forecasting output. In Elliott, Graham and Timmermann, Allan (eds.), Handbook of Economic Forecasting, Vol. 2A, pp. 141194. Amsterdam: Elsevier.Google Scholar
Clark, Todd E. (1994) Nominal GDP targeting rules: Can they stabilize the economy? Federal Reserve Bank of Kansas City Economic Review (Third Quarter), 11–25.Google Scholar
Dueker, Michael J. (1993) Can nominal GDP targeting rules stabilize the economy? Federal Reserve Bank of St. Louis Review (May/June), 15–29.Google Scholar
El-Shagi, Makram, Giesen, Sebastian, and Kelly, Logan J. (in press). The quantity theory revisited: A new structural approach. Macroeconomic Dynamics.Google Scholar
Feldstein, Martin and Stock, James H. (1994). The use of a monetary aggregate to target nominal GDP. In Mankiw, N. Gregory (ed.), Monetary Policy, pp. 769. Chicago: University of Chicago Press.Google Scholar
Fisher, Irving (1920) Stabilizing the Dollar. New York: Macmillan.Google Scholar
Friedman, Milton (1968) The role of monetary policy. American Economic Review 58, 117.Google Scholar
Friedman, Milton and Schwartz, Anna Jacobson (1963). A Monetary History of the United States, 1867–1960. Princeton, NJ: Princeton University Press.Google Scholar
Giannnone, Domenico, Reichlin, Lucrezia and Small, David (2008) Nowcasting: The real-time informational content of macroeconomic data. Journal of Monetary Economics 24, 665676.CrossRefGoogle Scholar
Hallman, Jeffrey J., Porter, Richard D. and Small, David H. (1991) Is the price level tied to the M2 monetary aggregate in the long run? American Economic Review 81, 841858.Google Scholar
Hendrickson, Joshua R. (in press) Redundancy or mismeasurement? A reappraisal of money. Macro- economic Dynamics.Google Scholar
Hetzel, Robert L. (2008) The Monetary Policy of the Federal Reserve: A History. New York: Cambridge University Press.CrossRefGoogle Scholar
Hetzel, Robert L. (2012) The Great Recession: Market Failure or Policy Failure? New York: Cambridge University Press.CrossRefGoogle Scholar
Hodrick, Robert J. and Prescott, Edward C. (1997) Postwar U.S. business cycles: An empirical investigation. Journal of Money, Credit and Banking 29, 116.CrossRefGoogle Scholar
Humphrey, Thomas M. (1973) Empirical tests of the quantity theory of money in the United States, 1900–1930. History of Political Economy 5, 285316.CrossRefGoogle Scholar
Ireland, Peter N. (in press) The macroeconomic effects of interest on reserves. Macroeconomic Dynamics.Google Scholar
Laidler, David E. W. (2013) Professor Fisher and the quantity theory: A significant encounter. European Journal of the History of Economic Thought 20, 174205.CrossRefGoogle Scholar
McCallum, Bennett T. (1988) Robustness properties of a rule for monetary policy. Carnegie-Rochester Conference Series on Public Policy 29, 173204.CrossRefGoogle Scholar
McCallum, Bennett T. (1990) Could a monetary base rule have prevented the Great Depression? Journal of Monetary Economics 26, 326.CrossRefGoogle Scholar
Meltzer, Allan H. (1987) Limits of short-run stabilization policy. Economic Inquiry 25, 114.CrossRefGoogle Scholar
Motley, Brian (1988) Should M2 be redefined? Federal Reserve Bank of San Francisco Economic Review (Winter), 33–51.Google Scholar
Orphanides, Athanasios and Porter, Richard (2000) P* revisited: Money-based inflation forecasts with a changing equilibrium velocity. Journal of Economics and Business 52, 87100.CrossRefGoogle Scholar
Orphanides, Athanasios and van Norden, Simon (2002) The unreliability of output gap estimates in real time. Review of Economics and Statistics 84, 569583.CrossRefGoogle Scholar
Reynard, Samuel (2007) Maintaining low inflation: Money, interest rates, and policy stance. Journal of Monetary Economics 54, 14411471.CrossRefGoogle Scholar
Serletis, Apostolos and Rahman, Sajjadur (in press) The case for Divisia money targeting. Macroeconomic Dynamics.Google Scholar
Spindt, Paul A. (1983) The money multiplier when money is measured as a Divisia quantity index. Economics Letters 13, 219222.CrossRefGoogle Scholar
Spindt, Paul A. (1984) Modelling the money multiplier and the controllability of the Divisia monetary quantity aggregates. Review of Economics and Statistics 66, 314319.CrossRefGoogle Scholar
Stock, James H. and Watson, Mark W. (1999) Forcasting inflation, Journal of Monetary Economics 44, 293335.CrossRefGoogle Scholar
Sumner, Scott (1989) Using futures instrument prices to target nominal income. Bulletin of Economic Research 41, 157162.CrossRefGoogle Scholar
Sumner, Scott (1995) The impact of futures price targeting on the precision and credibility of monetary policy, Journal of Money, Credit and Banking 27, 89106.CrossRefGoogle Scholar
Tatom, John A. (2011) U.S. Monetary Policy in Disarray. Networks Financial Institute working paper 2011-WP-21. Terre Haute: Indiana State University.CrossRefGoogle Scholar
Taylor, John B. (1993) Discretion versus policy rules in practice. Carnegie-Rochester Series on Public Policy 39, 195214.CrossRefGoogle Scholar
West, Kenneth D. (1986) Targeting nominal income: A note. Economic Journal 96, 10771083.CrossRefGoogle Scholar
Woodford, Michael (2012) Methods of policy accommodation at the interest-rate lower bound. In The Changing Policy Landscape, pp. 185288. Kansas City, MO: Federal Reserve Bank of Kansas City.Google Scholar
Working, Holbrook (1923) Prices and the quantity of circulating medium, 1890–1921. Quarterly Journal of Economics 37, 229253.CrossRefGoogle Scholar