The practice of setting target growth rates for a year or more ahead for some measure of the mofiey supply is now followed by many industrialised countries. However it has been suggested by a number of authors (e.g. Meade (I978) in his Nobel prize lecture, Tobin (I980) in his retrospective on stabilisation policy, Brittan (I98I)) that it would be more sensible to pursue targets for nominal income rather than the money supply. Meade, for instance, argues that controlling nominal income is in any case the ultimate goal of those who favour fixed monetary targets, and that an excessive concentration on the means rather than the end is confusing to private agents and can lead to undesirable fluctuations in the demand for output when velocity shifts. He goes on to advocate that nominal income targets should be linked to the development of wage-fixing institutions designed to mimic competitive behaviour. In this paper we examine the implications of such a proposal for the performance of the economy in the context of a simple stochastic macroeconomic model under rational expectations. A contracting framework is adopted in which the wage is fixed in a state of uncertainty about future levels of demand and productivity. The objective of the authorities is to minimise the divergence of output from its full information equilibrium level. If labour supply is inelastic then it turns out that maintaining the level of nominal income is actually the optimal policy. If labour supply is elastic nominal income targetry provides an optimal response to demand (IS/LM) shocks but a suboptimal response to productivity shocks. However, a sufficient condition for a nominal income target to be preferable to a fixed money supply target is that the price elasticity of aggregate demand be less than unity. The paper concludes by examining the implications of pursuing target growth rates rather than levels. It should be conceded at the outset that there are several pertinent issues not addressed such as the greater comprehensibility of nominal income targets to private agents, or the possibility that nominal income targets may leave the authorities with too much discretion, e.g. Poole (I980). The issue of labour market reform is also ignored. This is an enormous subject which it would be impossible to do justice to here - see for instance Meade's own analysis of the problem in Meade (I982). Such reforms might be expected to affect the parameters of the model. Nevertheless since changes in labour market practices are neither a precondition for, nor a logical consequence of, nominal income targets, an independent analysis of the macrceconomic implications of the latter is still highly relevant.
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