Nominal income targeting in an open-economy optimizing model

This paper presents simulation results regarding the performance of nominal income targeting, a monetary policy rule that sets interest rates in response to deviations of nominal GDP growth from a target path. The macroeconomic model is one in which agents solve dynamic optimization problems with rational expectations, but in an environment with slow price adjustments. In the present version, consumption choices reflect habit formation and the economy is open to international flows of goods and securities. When calibrated to quarterly US data, the model's results suggest that nominal income targeting performs well in relation to inflation targeting and Taylor rules. (C) 1999 Elsevier Science B.V. All rights reserved.