PERSPECTIVES OF IMPLEMENTATION THE NOMINAL GDP TARGETING

Abstract

The essence of monetary regime of nominal GDP targeting, its advantages and disadvantages, as well as factors complicating its implementation are considered in the article. Nominal GDP targeting is considered in comparison to inflation targeting, which is widely used in the practice of many central banks. It is emphasized that nominal GDP provides reduction of business cycle fluctuations and is also the best regime in case of unexpected supply disturbances. In the case of nominal GDP targeting, the central bank sets a target for nominal GDP growth. Nominal GDP is the market value of all finished goods and services produced in the country in one year, expressed at current market prices. Similarly to inflation targeting, when the Central Bank tries to reach a certain level of inflation, the central bank seeks to reach a certain level of nominal GDP or its growth rate, in a case of nominal GDP targeting. The basic idea of targeting nominal GDP is that it can help to reduce fluctuations in output and stabilize the business cycle. In general, during an overheating economy, the central bank pursues a restrictive monetary policy, while during recessions (or lower growth), an expansive one. This should stabilize fluctuations in output and reduce the negative effects of business cycle fluctuations. This is the main advantage of nominal GDP targeting, since its mechanism of action automatically leads to economic stabilization. The simulation results showed that nominal GDP targeting leads to lower volatility in both inflation and real GDP, than the Taylor rule with imperfect information. However, we should not forget that this is just a model, and the best results can only be obtained from the actual use of the regime. The economy of Ukraine is a small open economy, dependent on the dynamics of world prices for commodities that make up the main export items. In these circumstances, it is even more difficult to predict the real GDP growth rate. We believe that introduction of the regime of nominal GDP targeting in Ukraine can be considered after achieving stable rates of economic growth and inflation, since monetary policy is more effective in developed countries than in developing countries. Key words: nominal GDP targeting, inflation targeting, proposal building, GDP gap, monetary policy.