paper - Stanford University

Carnegie-Rochester North-Holland

Conference

Series on Public

Policy

22 (1985)

61-84

WHAT WOULD NOMINAL GNP TARGEllING TO THE BUSINESS John

DO

CYCLE?

6. Taylor*

Stanford University and

National Bureau of Economic Research

Many economists rule

for

an alternative should

to

keep

automatically velocity

The rule

also

ty. down,

this

has

the

money

must

are automatically

to

(1) keep

typically

prescribes

that

money

supply--growing

the

two reasons.

adjustment

in money

stabilize

as a new

is

for

in real

virtue

of

Consider Nominal

nominal

be increased offset.

GNP targetting

real

growth

in

as

policymakers along

First,

GNP.

GNP growth

viewed

it

would

in response

Second,

it

would

response

to

price

inflation.

easy.

adjustments. is

It than

should

stabilize

seems

The rule

GNP--rather

a reduction

should

policymakers

targetting.

an offsetting

for

nominal

GNP targetting

seems attractive

and

call

and this

automatic

for

shocks

automatically

to

nominal

call

proposed

Nominal

The rule

path.

shocks

recently

p0licy.l

to money-growth

aim

a target

to

have

monetary

simplicity. the

GNP is the

Nominal

of

target:

amount.

GNP is

how it

explanation

product

GNP on a fixed by an equal

(2)

Explaining

typical

also

money when

Hence, the

of

product

works the

two

and veloci-

velocity

velocity of

goes shocks

the

*This research was supported by a grant from the National Science Foundation National Bureau of Economic Research and was conducted in part at the Federal Reserve Philadelphia. I am grateful to Brian Horrigan, Allan Meltzer, and Robert Rasche for comments.

price

at the Bank of helpful

‘For example, see Feldstein (1984), Gordon (19831, Hall (1983). Meade (1978), and Tobin (1980, 1983). Criticisms of nominal GNP targetting are found in Brunner (1983) and Poole (1980). Bean (1983) provides a careful theoretical analysis of the implications of nominal GNP targetting in a model with sticky wages where the demand for I abor depends on the real His conclusion that nominal GNP targetting is preferable to money targetting if the wage. price elasticity of aggregate demand is less than unity corresponds to section I of this paper in the case where output stability (defined in terms of the deviations of output from ful I information output) is the sole criterion of macroeconomic performance. If price stability is also a goal, then an extremely steep aggregate demand curve (that is, an extremely accommodative policy) might not be desirable as is shown in Section I below.

0 167-2231/65/$03.30

01965

Elsevier

Science

Publishers

B.V. (North-Holland

level

and real

GNP.

With

real

GNP goes

down

will

then

downward

will

recover.

put

The purpose the

previous

would

perpetuate the ale

the

is

cyclical

that The

do to

What would

it

of

paper the

the

entirely

to

issues.

alone

explain

in

of propagation

One of targetting

the is

lag--emphasized instruments

by on real

the

proposals

for in

Hall

(1983)

proposes:

for

nominal

policy

GNP.

would

contract

it

vision. the

the

too,

provided

Each

year

administration,

mitment.

The with

advantage.

implied

social But

of experience

first

one-to-one priorities,

let

the

state

of

to the

rationpertains of

analyze,

complex

let

dynamic

of

the

policy

depend

in the

various

targets

should

example,

Robert

adopt

a target

above

path,

path

monetary

and would

be required

to

If

path.

are

for." Tobin

the In

(1983)

subject

nominal

on

a feedback The

For

GNP

well-known

rule.

James of

Fed,

nominal the

effects

be called

targets

to

GNP,

to

economy reacting says,

"I

annual

agreed

re-

upon

by

would

announce

the

intention

of

projection

would

be

a firm

com-

tradeoff

simplicity

target

path

the

economy."

62

effect

GNP were

would

its

with

would

GNP back

the

for

grips

economy.

price-output but

longer-run

and the

difficult

Congress

projection of

the for

simple

paragraph

on whether

nominal

and the year

that

an oversimplification

expansionary

numerical

a five-year

is

that

as important

variety--as

GNP targetting,

Congress, The

all,

expansion

the

paper

k percent

the

nominal

nominal

the

proposals

feedback

of

if

bring

cycli-

shocks

The dynamic

differ

future,

What

initiate

the

the

rigid

state

and for

monetary for

with come to

the

excessively to

path,

policymakers. fectly

In

proposal

of

a more

the

"Once

be judged

below

Hall's

like

to

as necessary

slipped

is

have

questions.

least

GNP than

these

involves

level.

GNP targetting

response

it

detail

of

previous

thus

(1969)--in

price

is

it

nominal

be adjusted

Friedman

GNP rule

whether

at

real

would

that

up,

economy

and targets.

do not

GNP and the

nominal

rule--or

is

problems

proposals

Milton

of

is

because

dynamic

the

point

in the

instruments

serious

that

shocks

is much more

terms,

policy

on two

the

and

does

more

Unfortunately,

effect effect

simple

between

whether

impact

goes the

GNP targetting

impact

GNP targetting

The propagation

interaction

money

the

level in

in somewhat

focuses

The main

nominal

price slack

and as it

nominal

do to

fluctuations?

effect

level,

to examine,

effect

GNP targetting

price

business cycle as the impact effect. for nominal GNP targetting described

almost

light

paper

when the

The resulting

on the

fluctuations.

fluctuations?

propagation

to

this

GNP rule,

amount.

pressure

paragraph,

nominal

cal

by an equal

of

on macroeconomic

a nominal

may not is

a major

be reconsidered

accord

per-

compensating annually

in

In

fact,

there

targetting

refers

or whether

it

no base

to

Yet

In

the

the

Karl

targetted

with

focuses

on the

disagreement rate

levels

Robert

Brunner full

of

base

of

GNP along enormous

(1983)

assumes

that

On the

other

nominal

whether

GNP, with

nominal is

drift. of

about

nominal

Gordon's

(1983)

levels

of

distinction

examining

targetting,

even

growth

the

refers

drift.

namics.

is

to

hand,

GNP along

the

for

for

the Hall's

with

the

dy-

nominal

growth

rate

GNP

that

proposal

growth

drift,

path

importance

is

GNP

base

a growth

proposals it

nominal

full

is

clearly

path

with

no base

the

impact

effect

drift. The of

next

nominal

section

starts

I then

set-up.. propagation

set

examination

a simple

up a simple

of various

should

be

The macroeconomic the

price

GNP is

aggregate

dynamic

framework

Therefore,

it

interested

in

the

quantities

of

interest

to

examine

the

target; as

in

are of

the

it

nominal

GNP per

fluctuations

nominal

rather,

be evaluated

IN A TEXTBOOK MODEL

fluctuations

components

a final

should

supply-demand

proposals.

level--the not

of

static

THE IMPACT EFFECTS OF GNP TARGETTING

No one se. GNP and

a brief

using

go on to

effects

I.

nominal

with

GNP targetting

GNP.

in real

In

this

sense

an intermediate

is

an alternative

to

other

target.

intermediate

targets. In tive Ml

this

section

as

target.

intermediate

reserves, with

the

time

of

the

impact.

equally period

aggregate

of

corresponding vertical

aggregate based

theory

misleading

impact

effects

It

assumed

is This

or to

and

that

nominal

for the

were is

use of

GNP and policy--

nominal

this

and

no difference that

a simple

GNP

difference

GNP and Ml

policy

alterna-

monetary

rate--affect

there

demand

each

in the

can

be con-

be fixed

textbook

curve

and an aggregate

macro

model.

real

output

Y is

be due

either

price-adjustment to

of from

as if

textbook

could

a sticky refer

as the nominal

instruments

I abstract

rule

Ml)

between

for

model

of

supply.

an elementary curve

(say

federal-funds

permits

an aggregate

axis

supply to

the

and aggregate

to

the

the

supply

difference

section

and that

1 shows

money

that

or

this

analysis.

demand

Figure on the

well

is

base, In

on the

the

trolled

targets lag.

entirely

on the An important

monetary

a longer

focus

is

I focus

intermediate

the

curve

the

to

The price horizontal

a Lucas-type

theory. as

63

on

a "supply"

supply

In the curve;

curve

level

P is

axis.

The

informationlatter rather,

case it

it is

PRICE A LEVEL

GNP

AD (MONEY

REAL OUTPUT

FIGURE

1

64

m

TARGET)

TARGET)

simply

a price-adjustment

curve

output

deviates

from

keeping

with

of existing

that

The slope

GNP or the

is

intermediate

the

If

la. shifts. the

aggregate

respect

to

spect to

interest interest

then

the

In

mand

for

this

money

on the

or

below. will

shift

there

is

an hyperbo-

real

spending is

whenever

there

is

is

an

will

with

for

rethese

the

target,

a shift

shift

when

autonomous

of

with

values

supply

curve

never slope

demand

money

the

GNP

curve the

money

numerical

the

on whether nominal

then of

of of

If

set-up,

when

in

If

demand

target,

elasticity

range

form

real is

depend

curve

aggregate

elasticity

curve

curve

demand

the

A probable

demand

when

terminology

target.

intermediate

and on the

reduced shifts

demand

aggregate

then

depends

adjust

supply

intermediate

the

be considered

aggregate

velocity.

The

aggregate

the

prices

textbooks.

is the

is

curve

rates rates.

will

the

fixed,

supply

demand

elasticities

of then

GNP is money

how

output.

supply

target,

the

shows

elementary

shifts

money

nominal If

potential

and the

nominal

that

in

the

shift

in

dereal

spending.

Shocks

Velocity

When the output

aggregate

and on the

ticipated.)

It

targetting fects

is

of

the

therefore money

should

that

targetting

A nominal

money supply

there

shifts

in

target

provides

an

impact

on real

of

as unan-

principle,

with

GNP target

is

be thought

nominal

respect

to

the

cushions

the

impact

GNP

impact

ef-

of

such

no cushion.

Shocks

Price

A "supply" curve.

The

shock, impact

demand curve. the

to

shocks.

shifts,

(The

clear

superior

while

curve

level.

is

velocity

shocks,

demand

price

If

supply

effect flat

aggregate

This

would

-money

will

estimated slope where demand

the

the

According

aggregate is

curve

for

the

slope

nominal

of to

demand of

these

steeper

Which

curve. is

65

a shift and

-1.

logs

real

demand

is

The slope The aggregate

A

output. targetcurve?

function

when Ml is in

a small

intermediate

demand

in

policy.

than

aggregate money

aggregate

then level

more

estimates

GNP targetting

steep,

supply

the

an accommodative

measured

log-IS

aggregate of

price

prices

a simple

curve the

on the

the

slope

very

policy.

to the

estimates

is

cushion

a nonaccommodative

of

on the

represent

would rise

a shift

curve

impact

would

curve

GNP--gives

logs.

b < 0

a large

is

depends

demand

This

demand

1 shows in

of

have

represent

shock,

a shock

aggregate

output.

or nominal Table

such

the

curve

on real

or a price

of

for

targetted,

Ml the

-(.23

-

of

aggregate

the

demand

.096b), curve

TABLE

Money-Demand

Sample: Dependent

Function

1954-m variable:

log(Ml/P)

Coef.

t-stat

log(Ml/P)~,

.627

4.0

log(Y)

,229

4.5

-.097

log(R) constant

R2

Note

= .92

:

1

*

The

= .59

estimation

method P is

0

coefficient.

0.4

0 = .017

justment. rate,

-3.4

.408

is

the

the

is

data

least

GNP deflator,

standard All

two-stage

error are

based

Y of

the on

is

squares

real

GNP,

regression, annual

66

averages.

with R is and

a

the p

is

serial

correlation

six-month

commercial

the

first-order

adpaper

correlation

will

have

a slope

of

-1

for

money-stock

targetting

if

b is

equal

to

about

The aggregate demand curve for money-stock targetting is steeper than -8. in the case of nominal GNP targetting for b larger than 8 in absolute value.

Equivalently

respect

to

targetting

interest

is In In

range. the

in

absolute

of

being

.125

advantage run.

The impact target

than

perfectly rate,

this monetary

base,

or

path.

For

the

money-demand the

GNP is

slope

of

results

the

A very Few of

which

of

the

interest that

nominal

expected

curve

by N* is curve

equal

to

again

equals

log(R) the

=

is

in

-1.

This

of

g smaller of

accommodation would

give

nominal

target.

the

inflation

by

one-to-one

and

An interest-rate after-tax and the

account.

67

are

by how much

in To

interest effects

When nomicase

special

the case

this,

reaction

the coef-

a nominal

GNP

specific

about to

rule

devi-

has many

be effective

rate, of

-

nominal

which

response

reaction

target.

then

tradeoff.

GNP targetting

interest-rate real

provided

from

for

than

the

GNP

g(log(PY)

(b-g)/g.

infinity,

price

interest

period,

target

choice

of

the

the

the

be adjusted

of

within

and

to

GNP deviated

values

would

rate

long

nominal

in

For

be the

the

the

by a money-

holding

Thus,

for

should

than

steeper.

any

in

responsive

nominal

demand

g is

reaction

of

has

more

tradeoff. amount

GNP from

be larger

than

an increase

replaced

rate,

proposals

disadvantages rate

the

the

sensitive the

instruments

ations

is

Rather

occurred

be

aggregate

demand

curve

be more

for

reaction

fixed,

one-to-one

g affects

rule.

the

the

aggregate

demand

ficient

of

case

completely

targetting run

this

the

Demand

could

call

interest

perfectly

in the

aggregate

of

slope

held

is

cushioned

Aggregate

suggests.

might

the

is

elasticity

short

reserves--whenever

equation R is

of

would

if

example,

where

Slope

analysis

constant,

the

GNP

be within This

would the

nominal

to

0.

targetting

GNP is

GNP target

rule

its

nal

simple

bound

money-stock

in

on real

than

near

GNP with

money-stock

GNP target.

nominal the

the

log(N*) 1, GNP. Then

shocks

and the

the

case

real

then

stock

time

any

accommodative

price

is is

money of

In

by a nominal

practice

shocks

and

of

-.125, shocks

elasticity

a period

more

price

elasticity

the

value.

elasticity 0 and

to

vertical,

Adjustments

In

short-run between

the

run

after

of

than

Instrument

is

Only

stock

run

short

curve

accommodative. than

short

very

IS

the is

accommodative

the

the

if rate

more

targetting. where

stated,

the

taxes

which

the requires

be taken

into

II.

PRICE AND OUTPUT DYNAMICS IN THE UNITED STATES

To examine

the

consider

a simple

States.

The model

described

in

targetting

rule

The

propagation dynamic is

the

model

given the

version

the

with

variables

(P). GNP and P is is

assumed sample

expectation in

method

which

in

more

in the

second

The first and

the

The with

price

decisions.

taken

as

(t-values

(2)

output

by

cross-equation The

first

growth

represents

the

The numerical maximum

restrictions

cross-equation

equation

is

rate

average

the

real

output

the

t-l.

obtained

inflation Y is

Potential

that

Et-l

and where

average

such

period

were

(y)

annual.

the

notation

the

the

are

year,

(1985).

of

real

of

y in

rational values likelihood

as explained

restrictions

based

Y*

on the

occur behavior

of

equation. to a dynamic aggregate

corresponds

equation aggregate

corresponds' supply

expectations

structural

coefficients

real

a level

through (2)

of in

equation

second

function. relation

The

Taylor

GNP

as follows:

p = (P-P-1)/P-1,

data

per

zero.

output

model

a nominal

+ 1.17.

and

All

and

two-equation how

(1)

detrended

with

account

in

expected

output

are

period,

(1)

takes

detail

(2)

on information

equations

United

(1.6)

3 percent

is

based

shown

because

at

sample

period

estimated

+ ytwl

GNP deflator.

grow

this

the

(l-3)

y = (Y-Y*)/Y*

the

to

GNP during the

explicitly

static examine

period

(2.5)

(1) and

in

More

in

+ .55,

yt = -1.01~~~1 + .69ptq2

The

the

then

empirically

(3.6)

(-3.5)

inflation

I first

dynamics.

+ .25Etmlyt

(10.1)

GNP targetting,

and

of I

1954-1983 sample

.89ptVl

nominal

output

section.

affect

for

of

of

a dynamic

is

Pt =

model

previous

would

in parentheses)

effects

of

I suppose for

the

to

function

demand

is

pressure

that

this

type

of

68

dynamic

a

essentially (as

aggregate policy

rule

supply

function,

aggregate a Phillips

measured

by y)

supply

function

changes

that

demand curve affecting can

we consider

be

Notice

below.2 permanently

that

above In

but

such

though

it

would

flation

to

be one

run

Phillips sample

period.

current

output

with

The

form

made

in

my

high

such

in

not

consistent assumed

inflation.

previous

to

inlong-

the

data

for

functional

corresponds

(e.g.,

Al-

lagged

a vertical

in this

aggregate

insti-

paper.

with

This work

reacts

inflation

of

impose

driven

were

this

coefficient

and thereby

be

a policy

considered

I have

inflation

of

the

is

to

be one or two

zero.

lagged

from

As with

one.

lation

between the

action

The

simultaneously the the

first

vice about

not

form with

the

Taylor

(1979))

demand

disturbances

sumptions

made

the

It and allow For

how of

but

all above.

the these

equation

is

the

and

possibilities, That

all

the

no current in

that

with

re-

comparison all

inter-

no simultaneous

interaction

allow current inflation in is

the

value

a whole

are

in

occurs

this

focus

on

interaction

occurs

real the

the

two

of

equations.

disturbances,

continuum. the

output second

continuum

structural

in

the coefficient of lagged inflation and the coefficient change with a change in policy regime. For example, would decline if policy became less accommodative, for In this paper I do not formally model these effects.

69

zero,

different

assumes

there

I

output from

is

all

a

constrained

Hence,

lags

we could current

one

data;

paragraph.

course, be possible to genereffects. But there are many

between any

there

(2).

impacts

correlation identify

that

opposite:

would, of for current

current

the

different

model

generally,

next

autoregression,

through

the

example, not allow

More

large

to

assumed

in

assumes

fit

insignificantly

is

dynamic

to the

coefficients

second-order

inflation

versa.

possible

consider

it

no lags. model

knowledge

is

%th probably inflation persistent.

and model

equation,

or

assumptions

than

output

in

certain

a coefficient

inflation

model,

simply

given

insignificantly

has

possibilities.

equation,

with

(1)

and

is

general

period

equation

with

alternative

Without

one

static

dynamic

was chosen

equation

a coefficient

static

between

effects. alize

In a more has

output

simple

the

autoregression

periods

and output

equation of

a second-order

lagged

with

second

interpretation

It

it

that

permanently

the

is

affect

could

a lag.

structural

in

also not

that

not

(1979))

constraint

Note

output

if

constrain

in Taylor

does

fact

shift is

to

this

that a

would

intervention

(as

assumption

implies

maintaining

be possible

that

the

by

equation

policy

this timing

the

curve,

captures

equation

normal

my view

rate. tuted,

this

Rather

structural with

of expected the coefficient then inflation

a lag

asis

demand would of lagged would be less

a

convenient

conceptual

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robustness

alternative The

simplification

as

period. rising.

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plicit

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the

nature

behavior

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1966-67,

1969-70,

of

for

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appearance

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with

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there

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business-cycle implicit

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gives real Table dies

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y based

2 give

impact

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ations,

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type

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inflation

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variables

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(2))

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1979-81.

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1973-74,

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policy

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TABLE

Moving

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correlation

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standard deviation than The four columns following

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(1)

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rules I then

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sample period, the variability

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inflation

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NOMINAL GNP TARGETS ON THE CYCLE

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examine

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cause

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not

effect

cycle. equation on the infinite

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nominal

GNP

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THE EFFECT OF ALTERNATIVE

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rules.

get

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of

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markets

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coefficients

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of Table 2. Demand shocks

shocks

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recession

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bottom

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a slump

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shocks.

effect

shocks to inflation cause accommodate the inflation; eventually

the

inflation shocks. of moving average

eventually but not permanent; and then returns to the mean; to

at

standard

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case

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rate

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nominal conditions

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no correction for mistakes in the previous stipulates that nominal GNP will grow at 3 72

percent

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nominal

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to each

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setting shocks

and

shocks

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GNP growth-rate

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business-cycle the

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historical

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3 shows

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Table

Table

proportional

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rate

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have

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be one way to model

an interesting

comparison

with

the 73

effect estimated

of

policy.

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reaction-function

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profor

TABLE

Cyclical When

Behavior a Nominal

Inflation

GNP Growth

Rule

and

Output

is

Used

PP

YP

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The

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infinite (2)

with

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74

representation

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the

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obtained

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to

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get

(2).

4. The

Table

rule effect

of

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dynamics

in

Table

economic

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than

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1954-83

nominal

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are much better.

GNP Rule

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with

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3.

following

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that

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to

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inflation

inflation

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inflation dynamic

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Table

5 shows

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generate

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moving price

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or

output

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one-to-one nominal

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average

level

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not

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that

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temporary

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(assuming below.

case rule

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shock

overshooting one-to-one

(4),

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right-hand

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of

on the GNP rule

for

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shocks. period

nominal

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representation

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is

accurate)

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is

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price

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flation

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better (1)

cycle.

persistence.

that

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actual

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than are

equation

again

output.

Note

properties

assuming does

omitted.

would of

in-

output-price

in inflation.

Rule in equation

A more one-to-one

general

relation. 75

(4)

moves version That

is,

real of

output the

on a

modified

TABLE

Cyclical with

Behavior

a Nominal

Based

and on

Inflation

Lagged

Inflation

PY

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:

Output

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GNP Rule

of

4

The

columns

replacing

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76

representation

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the

model

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by

TABLE

Cyclical

Behavior with

Note:

of

5

Inflation

a Modified

and

Output

GNP Rule

PP

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columns

replacing

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infinite (2)

with

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77

representation

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the

model

obtained

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Yt = -BPt, where

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(44

special

have

the

more

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fied

nominal

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variances

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Taylor

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(4a)

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with

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covariance the

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8 for

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FORECASTING VELOCITY

If

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velocity

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Ml

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SHOCKS

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continues,

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t

rule:

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- 2.6

(6) to

equation 78

(5),

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deviation

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locity,

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velocity

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short-run

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LAGS IN THE EFFECT OF MONETARY POLICY problem affect

with the

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components 79

GNP targetting of

nominal

is

GNP--real

that

the

GNP and

inflation--with occurs

whether

interest for

the

rate

To see section

used

it

one year

appears

words, instruments

of of

justment

policy,

m on

on the

t-values

are

simply

states

that

used

in

equation justment tive hand (7) (7).

which

below

get

the

of

than

current form

(1)

and

behavior

values, equal

let

of the

a rather

and multiply

in

denoted the

at

an

by m.

The

price

ad-

to

minimize

lag.

equation

and

than

the

the

of

The equation money

With longer

of

for

m,

lags

the term

value

of

with

the

particular

the was

real

money

from

three-equation

.707.

by 6; add this

of alternaon the

right-

Substitute to equation

(9) in

y + ap the

growth

to

mt = (a-.65a)/(a(I+.256))Pt.

(10) 80

the

a price-ad-

+ .256)mtTl,

fluctuations

data,

omitted

effect

equation

to

equation

To see the first

relative

annual

and were

rule

coefficient

(7)

(A quarterly

and m.

+ a(1

be equal

growth

When combined

a policy p, y,

Yt + BPt = (.656-a)ptml that

One output

R2 = .83

this.

(7).

constants)

(omitting

of

value

the

gives

implies

other policy

explicitly

through

1981.

coefficients

resulting

of money should

(Ml)

this

In the

coefficients.

a one-year

precise The

1967 to

rate

the

This

by

in

m.

with

look

work

estimated

the

insignificant

like

(7)

the in

simple

the

parameter (1)

I

D.W. = 1.92,

GNP with

and

equation

side

reported

(1979).)

generates

into

growth

function

above, to

I estimate

money

money supply

from

+ 1.2, (5.4)

real

small

to

output

is:

- pt-I)

be made more

Taylor had

y to

assumed

period form

an increase

affects cannot

growth

model

sample simple

= .707(mt-I (8.0)

inflation

in

(1).

where

timing

the

changes

causes,

demand (2)

then

leads

this

output

case

and

two years.

problem

equation

is

output

(Ml)

aggregate

in this

a particularly

Yt

in

inflation

equation

I focus with

as

for

growth

relating an

than

monetary aggregate, or the real During the last 15 years,

by about the

inflation

instrument.

money

of

for

a higher

inflation

using

implicit,

instrument effect

that

equation than

longer

base,

magnitude

a simple rather

is

as a policy

and leads the

lag

monetary

is

example,

about

The

a lag.

rate

This

rule

lation

for

the

between

there

is

a slight

coefficient rule

that

is

very for

(10)

incorporates

small.

above

takes

The

following

business-cycle During

having

used

GNP

a reduction look

lags

the

a nominal

(say

the

but

in

in

like

the

effect

of

effects

of

the

this

analysis

of

the

cycle:

the

effects

to

of

examine

focus

the

solely

nominal

GNP targetting

dynamic on

by always

reacts

to

much of

a type

of

lagged

when combined cycle

effects

the

of

growth

causing

it

the

One the

on

the

rate

economy

change in 'or

pending

from

inflation

reduce

the

rule

the

the

procedure.

could

to

worsen

overshoot

its

This

the

price

level.

than,

one-to-one

relative

in

rule The

welfare

and

can

which

This

rule,

contributed

of

to

GNP rule

level

real of

of

real

keeps of

GNP and the

to

GNP to

output

that deviations

be generalized of

business-cycle

proportional

the

significance

rule

and "boom-bust"

length

nominal

involves

reactions

has

overshooting

and the

rule

inflation.

as

behavior.

this

a modified rate

be interpreted

a growth-rate

equation,

amplitude

is

Fed can

is

changes

prevent

inflation

trend.

It

and "boom-bust"

must

more on the

lagged

the

price-adjustment

rule such

sum of

output

and

overshooting to

period,

GNP rule.

a simple

is

fluctuations. constant

postwar

nominal

A new policy if

the

inflation

with

by causing

(3)

permit

less

inflation,

de-

fluctuations

versus

fluctuations.

(4)

The actual

operational

nominal

instrument are

GNP targetting.

difficult namics

that

re-

6 = 1,

after-shocks.

(2)

rule

is

necessarily

of

lagged

increases

here

not

account

summarize

business

fluctuations

equilibrium

than,

inflation

stringency

would

the

cx = .7 and

CONCLUDING REMARKS

conclusions on the

In evaluating (1) it is important economy, Nominal GNP rules that

real

of

where

policy.

GNP targetting

cycles

when point

target

explicit

effect

case

in monetary

VI.

the

the

The essential

an increase

that

the

For

in money growth

y + p grows

in

monetary

supply

and inflation.

increase

calls

m) whenever policy

money

output

to and

usually This

evaluate thereby

not

because the

adjustments

influence

necessary

specified lack the

of

in

of

a nominal

81

various

specification

instrument

fluctuations.

the

to make a nominal

adjustments GNP rule

proposals

makes

the

affect

GNP for

policies the

on business-cycle

dy-

(5)

Many proposals

the

lags

with different implicit

As

in

in some of

the

proposals.

is

evident

out

the

proposals.

be dealt

much

easier

to

state plan

interpret

Fed

in

realistic for

GNP rule,

forecasts

to

goals

with of

and fiscal

the

take

account

nominal policy.

82

for

rule,

the

of

problems

can

lags

the

in

no rule

GNP would

policymakers and

is

explanations

or even

nominal

GNP growth

than

emphasized

these

on nominal

Congress

a

and has attempted

of

The aims of

require

policy

has

several

another

explicitly

lags

come up in simple

discussions

their

paper GNP rules

paper,

performance. if

this

nominal

proposals

deal

Such

of monetary

usually

policy

conjunction

monetary

not

the

a nominal policy

for

do not

policy.

instruments

in the

focussing

improve The

have

by modifying

But whether

greatly

proposals that

GNP targetting monetary

conclusions,

As indicated

instituted,

view

these

recent

problems

with

economy.

intended

from

with

point

should

the

setting

to

stated.

of

for

of

is

nominal

operation

procedure

difficulties

all

for

the

GNP were the

would clearly

administration

conditional

at

in my

on their

be

References Bean,

C. (1983)

Targetting

Nominal

Income:

An Appraisal,

Economic

Journal,

93:

806-819. Brunner,

K. The

(1983)

Politics

of

Committee, Feldstein,

Policy

Monetary

Policy,

Friedman,

its

Ideology.

Shadow

and Position

Open Market

Papers.

before

the

Annual

Conference

of

the

Bank.

M.

(1969)

The Lag in the ty of Money

Effect

and Other

of

Monetary

Essays.

Policy,

Chicago:

The Optimum

Quanti-

Aldine.

R.J. (1983)

The

Conduct

No.

1221.

of

Domestic

Monetary

Policy,

NBER Working

Paper

R.E. (1983)

Macroeconomic and Public

Meade,

Statement

Remarks

Export-Import

Hall,

and

M.

(1984)

Gordon,

Myopia

Policy

Policy,

under

Federal

Structural Reserve

Change,

Bank of

Industrial

Kansas

Change

City.

J.E. (1978)

The

Meaning

of

Internal

Balance,

Economic

Journal,

88:

423-

435. Poole,

W. (1980)

Taylor,

Commentary,

Brooking3

Papers

and Control

of

on Economic

Activity,

NO. 1; 79-85.

J.B. (1979)

Estimation Expectations,

Econometrica,

83

a Macroeconomic 47:

1267-1286.

Model

with

Rational

Taylor,

J.B. (1985)

Improvements and Prices, University

in

Macroeconomic

The American of

Chicago

Performance:

Business Press

for

Cycle:

The

Role

Continuity

National

Bureau

of

Wages

and Change, of

Economic

Research. Tobin,

J. (1980)

Stabilization nomic

(1983)

Policy

Ten Years,

Brookings

Papers

on Eco-

1: 19-72.

Activity,

Commentary,

after

Industrial

Bank of Kansas

Change

City.

84

and Public

Policy,

Federal

Reserve