GDP Targeting Research Articles

The case for nominal GDP level targeting

AbstractIn this paper, I make the case for a nominal GDP level target in the United States. I begin by arguing that the Federal Reserve's current flexible average inflation targeting regime is deficient. I then argue that since a competitive monetary equilibrium is optimal, monetary policy should seek to replicate the competitive monetary model. Doing so resembles nominal GDP targeting. I also offer the following practical reasons why policymakers might prefer a nominal GDP target. Nominal GDP targeting (a) does not require policymakers to determine whether current economic fluctuations are demand‐driven or supply‐driven nor does it require real‐time estimates of the output gap, (b) automatically prevents the central bank from exacerbating supply shocks, and (c) leads to greater financial stability. Finally, I make the case for targeting the level, rather than the growth rate, of nominal GDP. Doing so prevents the path of nominal GDP from deviating arbitrarily far from its intended growth path, which anchors expectations and aids in long‐run economic decision‐making.

Determinacy and E‐Stability with Interest Rate Rules at the Zero Lower Bound

AbstractWe evaluate and compare alternative interest rate rules, namely, average inflation targeting (AIT), price‐level targeting (PLT), and traditional inflation targeting rules, in a standard New Keynesian model that features recurring, transient zero lower bound regimes. We use determinacy and expectational stability (E‐stability) of equilibrium as the criteria for stabilization policy. We find that PLT policy, including nominal GDP targeting as a special case, most effectively promotes determinacy and E‐stability among the policy frameworks, whereas standard inflation targeting rules are prone to indeterminacy. AIT can induce determinacy and E‐stability effectively, provided the averaging window is sufficiently long.

Commodity price shocks and monetary policies in commodity exporting African countries - A DSGE analysis

The study investigates alternative monetary policy rules in commodity-exporting African countries, by formulating, estimating and simulating a DSGE model for 5 African countries. We apply the Bayesian technique for our estimation and utilize impulse response functions to evaluate alternative monetary policy rules to commodity price shocks. Our results show that commodity price shocks influence business cycle fluctuations in African countries, whereas the results from alternative monetary policy rules are mixed. The findings show that nominal GDP targeting (NGDPT) is the best policy rule to minimize output volatility and price variations against positive commodity price shocks. However, if the objective is to minimize the effects of positive commodity price shocks on the exchange rate, the inflation targeting (IT) is the best policy rule. Further, the findings shows that IT and NGDPT are the best policy rules to stabilize output and prices against negative commodity price shocks while exchange rate targeting (ERT) is the best policy rule to stabilize exchange rate against negative commodity price shocks.

Government GDP targets and corporate capacity expansion – Empirical evidence based on A-share listed companies

The phenomenon of Chinese-style capacity expansion is widespread and closely tied to the interventionist behavior of local governments. Using data from A-share listed companies between 2010 and 2021, we find a significant correlation between economic growth targets and corporate capacity expansion. The impact of growth targets on capacity expansion is more pronounced during the National Party Congress, when officials use stricter constraints and when the municipal party secretary is around 55 years old. Officials influence capacity decisions by allocating key resources such as land and finances. We provide valuable insights into Chinese-style capacity expansion, offering reference significance for promoting China's supply-side structural reform.

Controlling GDP and Debt with a Post-Keynesian model

Our aim in this paper is to design a set of fiscal policy rules using a linear, discrete macroeconomic Post-Keynesian model with delays. We develop algebraic methods with appropriate symbolic algorithms that produce a solution, which allows us to find a path for the desired GDP and debt targets to be met.
 
 Keywords: Fiscal policy, Symbolic algorithmic methods, GDP, Debt, Algorithmic control
 JEL Classification: E00, E62, E12

The influence of institutional pressure on target setting

We examine whether the desire to maintain sociopolitical legitimacy with critical stakeholders affects sales targets set by Chinese firms. Drawing from institutional theory, we argue that enterprises owned by local government (local-SOEs) feel greater pressure to maintain their legitimacy with the local government relative to private firms (non-SOEs), leading to a stronger association between the provincial GDP target (a legitimate benchmark) and firm-level targets. Results from manually collected data support this conjecture and are robust to alternate measures and samples. Increases in the demand for legitimacy -- measured using exogenous shocks and sample characteristics -- strengthen the association. Finally, changes in the coverage in the official press and changes in target achievement rates document the real effects of this strategy. Our findings demonstrate the effects of institutional pressures on corporate decisions and enrich our understanding on the socially constructed as well as instrumental rationality role of management accounting.

Monetary policy with non-Ricardian households

This paper analyzes how the presence of non-Ricardian households can alter the dynamics in a New-Keynesian Dynamic Stochastic General Equilibrium (NK-DSGE) model. The model is calibrated using data for the US economy. We focus on two key areas. The first is the link between monetary policy and consumption inequality in the presence of non-Ricardian households. We find that a contractionary monetary policy shock increases consumption inequality. Part of this increase is due to a novel government transfer channel. This channel becomes significantly stronger when steady state debt is positive. We also find that because of this link, the presence of non-Ricardian households amplifies the impact of monetary policy on output and inflation. The second area relates to the choice of monetary policy rule. We compare six monetary policy rules, including a new labor income targeting rule. We find that labor income targeting outperforms all other rules for most parameter values. Nominal GDP targeting is better than labor income targeting only when the share of non-Ricardian households is large or when the households exhibit low habit persistence.

PERSPECTIVES ON THE TRANSFORMATION OF NATIONAL MILITARY STRUCTURES SO AS TO ADAPT TO THE ALLIED CONTEXT

The complexity of the security situation at international and especially regional level, generated by Russia's aggression against Ukraine, accentuates the need to develop and strengthen the North Atlantic Alliance's collective deterrence and defence posture. The collective defence system is and will remain an effective element in geopolitical equations, especially in the current context, when the threat spectrum is unprecedentedly diverse, and the system is NATO's main objective. Against the backdrop of these challenges, following the financial crisis and in particular since 2014, with the NATO Summit in the UK (4-5 September 2014), there has been a demand at Allied level for a robust set of defence capabilities capable of responding effectively to the full spectrum of threats and supporting NATO's political and strategic objectives in the coming phases. Initiatives such as the 'Defence Capability Building', the 'Interoperability Platform' or the 'Connected Forces Initiative', together with the gradual increase of defence budgets to reach the 2% of GDP target, have been aspirations adopted by Member States and largely imposed at national level. Subsequent Summits since 2014 have made significant progress in strengthening NATO capabilities and adapting the Alliance to the current geopolitical reality. Therefore, as the types of threats confronted seem to evolve and acquire increasingly diverse features, states and their instruments, in turn, must undergo a process of transformation and adaptation, both individually, at state level, and in the allied context. Transformation is a constant challenge and requirement for the Alliance and its members, which will have to be faced continuously.

WHERE IS THE FUTURE? Geography, Expectation and Experience across Three Decades of Malaysia's Vision 2020

AbstractIn 1991, the Malaysian Prime Minister, Mahathir Mohamad, announced Vision 2020 to make the country ‘fully developed’ by that year. Launched during a period of rapid economic growth, Vision 2020 legitimized Mahathir's developmental penchant for spectacular urban megaprojects and ambitious technological experimentation. While hopes of reaching Vision 2020's crude GDP targets were dashed even before the end of the 1990s (largely as a result of the Asian financial crisis), and Mahathir stepped down from office in 2003, the year 2020 retained significance as a horizon of expectation for a generation of Malaysians. In this Interventions essay I look back at three decades of Vision 2020 from the temporal vantage point of 2020. The lead‐up to that year saw political, popular and artistic retrospection on Vision 2020, spurred in part by nonagenarian Mahathir's return to power. Contextually, ‘Where is the future?’ articulates unrealized technological and developmental expectations from peak Vision 2020. Conceptually, the essay offers a critical geography of political futures past—demonstrating the constitutive spatiality of future expectations and the diverse ways in which elite developmental visions are engaged in life geographies, spaces of experience and representational practices.

Processing industry of Russia, anticrisis measures, credit excess and offers for the Bank of Russia under new anti-Russia sanctions

Objective: to analyze the transformations in the Russian manufacturing industry associated with the massive renewal of the material and technical base of the machine-building sector.Methods: the article uses empirical, logical, comparative and statistical methods of analysis.Results: under the new sanctions, mechanical engineering, primary machine-building, should become the main area of transformations in the Russian industry, functioning on a new technological basis. The article analyzes the Russian machinebuilding sector and the development strategy of the manufacturing industry for the period up to 2035; the sources of financing of the Russian manufacturing industry are investigated; the current state of development of the Russian manufacturing sectors for January-March 2022 is shown; the anti-crisis measures of the Bank of Russia in the context of new economic sanctions are analyzed; a package of additional measures is considered related to the relief of credit overheating, accounts payable and receivables at Russian industrial enterprises in the short-, mediumand long-term.Scientific novelty: under the large-scale restructuring of the Russian economy, the Bank of Russia needs to switch to the nominal GDP targeting mode, to carry out the denomination of settlements and payments for export products in rubles tied to the target price of gold as a standard of value; to minimize and mitigate the risks of inflationary factors in industry by creating a Bank of bad debts.Practical significance: the main provisions and conclusions of the article can be used to carry out a large-scale modernization of the manufacturing industry of the Russian economy, ensuring the flow of modern technologies and products to the domestic market and taking into account the technical and economic features of the development of Russian regions.

Monetary policy regimes: A global assessment

AbstractAn eight‐region, stochastic, general equilibrium model that incorporates global money and financial markets is used, first, to identify the distributions of regional supply side shocks in 1954–2016 from real GDP data. Second, in Monte Carlo simulations, the model is subjected to random draws from these distributions in all regions simultaneously, under a range of combinations of monetary targets. These experiments begin with a comparison of the volatilities of output and welfare (defined as the purchasing power of disposable income at regional prices) under current de facto and de jure monetary targets. The results show that the de facto targets offer significant improvement. A further analysis of targeting games suggests that a Nash equilibrium on output risk is dominated by nominal GDP targeting, while the corresponding Nash equilibrium on welfare risk has predominant inflation targeting (IT). Notwithstanding IMF policy to convert developing country central banks to inflation targeting, a fallacy of composition is observed in the spread of IT internationally. This spread tends to raise the volatility of welfare in the established open economies.

Demand Deficiency and Inflation in the G7 Countries

In this paper, we analyze the relationship between nominal and real GDP growth for G7 countries for the period 1971 – 2018. A visual inspection of the data indicates the presence of a threshold, above which the structure of the relationship between nominal and real GDP growth rates changes from a positive one to a flat one. Moreover, the volatility of real growth is observed to be higher at high rates of nominal GDP growth. We first test for the presence of a two regime non-linearity by using the Sup F test of Andrews (1993). Due to the presence of heteroskedasticity we also apply the Sup MZ test of Ahmed et al. (2017). Both tests operate under an unknown change point and the latter also allows for
 heteroskedasticity. The results of the tests point to the presence of a ‘demand deficiency ’regime for low nominal demand growth rates and to a ‘harmful inflation ’regime for higher nominal GDP growth rates, these results have strong implications for guiding recent policy discussions on nominal GDP targeting.

Monetary Policy Regimes in Small Open Economies: The Case of Sri Lanka*

This paper quantifies the performance of five alternative monetary policy regimes in controlling macro volatility in a small open, emerging economy. The effects of supply, demand and external shocks are analyzed using a generic structural macro model and Monte Carlo simulation, calibrated to the case of Sri Lanka. Investigated regimes separately target the exchange rate, monetary aggregates, nominal GDP, the consumer price index inflation rate and a Taylor composite of output gaps and inflation. The results suggest that nominal GDP targeting minimizes real GDP volatility, and when stabilizing economic welfare is the objective, volatility is minimized under inflation targeting and Taylor policy rules. The IT regime is most effective under demand and external shocks, which have grown more prominent as product and financial markets have opened.

Optimal monetary–fiscal policy in the euro area liquidity crisis

We build an euro-area level DSGE model featuring a liquidity shock in the sovereign bonds market to simulate the strong contraction in economic activity observed during the 2008–2009 crisis. In the model, a sudden deterioration of the liquidity property of sovereign bonds is associated with deep recession and deflation. Against this background we characterize optimal monetary and fiscal policy with full commitment. We find that the optimal policy contains three features: (i) the policy rate is lowered until hitting the zero lower bound (ZLB) and then is kept at the ZLB for more periods; (ii) a prolonged central bank’s balance-sheet expansion aimed at restoring the liquidity deteriorated; (iii) a counter-cyclical fiscal stimulus which offsets, to a large extent, the fall in private spending caused by the liquidity shock. Policy regimes involving (i), but not (ii) and (iii), are quite weak in stabilizing output gap and inflation. Monetary policy regimes such as full inflation-targeting or nominal GDP targeting perform remarkably well insofar as they are complemented with an optimally-implemented counter-cyclical fiscal policy. Our results tend to favour the view that, in case of recession, an euro-wide coordinated fiscal policy should supplement the role of the ECB in achieving its primary objective.

An Assessment of the Inflation Targeting Policy in Turkey and Evaluation of the GDP Targeting Policy as an Alternative

Enflasyon hedeflemesi politikası 1990’lı yıllardan itibaren ilk olarak Yeni Zelanda’da uygulanmaya başlanan daha sonra tüm Dünya’da hem gelişmiş hem de gelişmekte olan ülkelerde uygulanan bir para politikasıdır. Özellikle 2008 küresel finansal krizine kadar kendisine geniş bir uygulama alanı bulmuş olan enflasyon hedeflemesi politikası kriz ile birlikte özellikle gelişmekte olan ülkelerde bazı sorunların ortaya çıkmasına yol açmıştır. Sorunların çözümünde enflasyon hedeflemesi politikasının etkisiz kalması üzerine daha önceden de literatürde kendisine yer bulmuş olan GDP (Gross Domestic Product) hedeflemesi politikasının uygulanabilirliği tartışılmaya başlanmıştır. Bu çalışmanın amacı; Türkiye’de uygulanan enflasyon hedeflemesi politikasının başarılı olup olmadığını tespit ederek GDP hedeflemesi politikası hakkında bilgi vermektir.

On the welfare implications of nominal GDP targeting

This paper examines the welfare implications of a nominal GDP growth targeting rule, a nominal GDP level targeting rule, and inflation targeting regime in a New Keynesian model featuring positive trend inflation, two measures of welfare, and both high and low growth environments. The paper finds that (i) in general, nominal GDP growth targeting dominates other rules with changes in all dimensions; (ii) nominal GDP growth targeting framework is superior to the level targeting regime for most scenarios; (iii) inflation targeting is preferred to nominal GDP level targeting regime, but to minimize short-run fluctuations, the latter is advantageous; (iv) nominal GDP level targeting may be desirable only in a low growth environment with both low inflation indexation and consumption equivalence criteria. The simulation results provide solid evidence to policy makers on the desirability of nominal GDP growth targeting.

Shadow banks, banking policies and China’s macroeconomic fluctuations

This paper develops a model of the Chinese economy using a DSGE framework that accommodates a banking sector and money. The model is used to shed light on the period of the Global Financial Crisis. It differs from other applications in the use of Indirect Inference to estimate and test the model. Officially mandated bank lending and government spending were used to supplement monetary policy to aggressively offset shocks to demand. This paper examines the efficacy of monetary policy in terms of the reduction in the frequency of severe economic slowdowns. We find that monetary policy can be used more vigorously to stabilise the economy, making direct banking controls and fiscal activism unnecessary. A nominal GDP targeting monetary policy is the most efficient, compared with a conventional Taylor Rule, a Friedman rule or a price level targeting rule.

A toolkit for solving models with a lower bound on interest rates of stochastic duration

This paper presents a toolkit to solve for equilibrium in a computationally efficient way in economies facing the effective lower bound on the nominal interest rate under a special assumption about the underlying shock process, a two-state Markov process with an absorbing state. We illustrate the algorithm in the canonical New Keynesian model by replicating the optimal monetary policy in Eggertsson and Woodford (2003), and we show how the toolkit can be used to analyse the medium-scale dynamic stochastic general equilibrium model developed by the Federal Reserve Bank of New York. As an application, we show how various policy rules perform relative to the optimal commitment equilibrium. A key conclusion is that previously suggested strategies – such as price level targeting and nominal GDP targeting – do not perform well when there is a small drop in the price level, as observed during the Great Recession, because they do not imply a sufficiently strong commitment to low future interest rates (“make-up strategy”). We propose two new policy rules – the cumulative nominal GDP targeting rule and the symmetric dual-objective targeting rule – that are more robust. Had these policies been in place in 2008, they would have reduced the output contraction by approximately 80 percent. If the Federal Reserve had followed average inflation targeting – which arguably approximates the policy framework announced in August 2020 – the output contraction would have been roughly 25 percent smaller.

The Implication of Financial Derivable from Abroad on West African Monetary Zone’s ECO Currency

This study aims to determine the extent to which the West African Monetary Zone (WAMZ) can fulfill the Expost conditions for achieving convergence. This study, therefore, evaluates the pattern of shock symmetry and convergence in connection to WAMZ’s Pillar III policy strategy. Time series data sourced from the World Bank for the period covering 1970 to 2017 were utilized for this study. Two basic econometric tools such as Impulse Response Function (IRF) and the ADF convergence test were employed to determine whether WAMZ can achieve selected Macroeconomic Convergence Criteria (MCC) in the long-run. From the study, we found that WAMZ is not a full potential candidate for ECO Economic and Monetary Union (EMU) due to the inability of the available results to show overall shock asymmetry in the entire models studied. Also, the study found that WAMZ could attain convergence in its inflation targets, but could not attain convergence in its GDP targets. Thus the results imply that in the long-run, WAMZ does not practically possess the attribute to achieve its MCC. Hence, it is imperative that for the adoption of the ECO currency, WAMZ should design and implement a short-run adjustment method to manage country-wise shocks and implement structural buffers to guard the WAMZ economies against structural shocks. Hence, we recommend that ECO currency be a reserve currency managed by the West African Currency Board (WACB) while the EMU member maintains its domestic currency. WAMZ is basically a quasi EMU.

TOWARD A NEW COMPARATIVE PUBLIC LAW OF CENTRAL BANK LEGISLATION: Designing Legislative Mandates for Central Bank Private Securities Assets Purchases and Nominal GDP Targeting

Abstract What role could unconventional monetary policy – and particularly unconventional policies like private asset purchases under a quantitative easing or lender of last resort scheme – play in influencing economic growth directly? A wide literature in economics explores the pros and cons of using these policies. However, most studies also point to the uncertain and antagonistic legal basis for such purchases. In this paper, we show how the statutory mandate for nominal GDP targeting could best put in place the legal foundations for such asset purchases. We review the legislative and regulatory bases for private securities purchases made by central banks in a sample of countries. We discuss – if legislators and policymakers wanted to – how they might introduce clearer mandates to make such purchases into their public law. We finally show how legal authorizations for GDP targeting might (and probably should) provide for such authorisations. Our discussion sheds light on the fascinating and almost completely ignored area of public law, namely central bank law.