Targeting Rules for Monetary Policy / Joshua Aizenman, Jacob A. Frenkel.

Format:

Book

Author/Creator:

Aizenman, Joshua.

Contributor:

National Bureau of Economic Research.

Frenkel, Jacob A.

Series:

Working Paper Series (National Bureau of Economic Research) no. w1881.

NBER working paper series no. w1881

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1986.

Summary:

This paper develops an analytical framework for the analysis of targeting rules for monetary policy. We derive the optimal money supply rule and analyze the implications of other monetary rules including rules that target nominal GNP, the price level, the monetary growth rate and the interestrate. An explicit welfare criterion is used in order to rank the alternative rules. In the model monetary policy is needed because labor market contracts set nominal wages in advance of the realization of the stochastic shocks. The principal result is that the welfare ranking of alternative targeting rules depends on whether the elasticity of labor demand exceeds or falls short of the elasticity of labor supply. Specifically, it is shown that if the demand for labor is more elastic than the supply, then targeting nominal GNP produces a smaller welfare loss than targeting the CPI which in turn produces a smaller welfare loss than interest rate targeting.

Notes:

Print version record

April 1986.