OPEN-ECONOMY MARKET: Nominal Income Targeting 4

Labor is immobile across countries and, in addition to being an employer of labor, each household is endowed with one unit of potential work-time each period, which it supplies inelastically to the domestic labor market. Governments, both domestic and foreign, are assumed not to issue debt, but each country has a private security denominated in […]

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OPEN-ECONOMY MARKET: Nominal Income Targeting 3

The model depicts an open economy that is small in a sense that will be spelled out below. This economy is populated by a continuum of households over (0,1). A typical household maximizes P7 w(C,+/, C,+/_ь Mt+Jf /*%), where Ct is an index of household consumption in period f, Л/,/7*4, denotes its end-of-period real money […]

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OPEN-ECONOMY MARKET: Nominal Income Targeting 2

In the third column of Table 1, expected next-period nominal income growth is replaced by expected current nominal income growth, EM Ax,. The improvement in fit over CGG’s specification becomes more noticeable, with the residual standard deviation about a fifth lower than that of (3.1) (0.94% vs. 1.14%). Source Compared to the results with Em […]

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OPEN-ECONOMY MARKET: Nominal Income Targeting

In this section we estimate a specification closely related to CGG’s, and compare it to a specification in which policy responds to expected nominal income growth instead of expected inflation. Our version of CGG’s (1997) specification is as follows: with рл e(0,l) and ewhite noise. Here 4Rt and 4Apt are the annualized values of the […]

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OPEN-ECONOMY MARKET: Existing Arguments for NIT 4

The upshot of the foregoing discussion is that arguments pro and con regarding NIT rules relative to ones with inflation and output gap target variables depend upon details of the dynamic relationships between nominal and real variables, about which prevailing theory is not particularly helpful. In Sections 4-8 of this paper, consequently, we shall attempt […]

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OPEN-ECONOMY MARKET: Existing Arguments for NIT 3

A frequently expressed objection to NIT is that national income statistics are not produced often enough or quickly enough — and are often significantly revised after their first release. It can be argued, however, that the essence of the strategy is to use some reasonably comprehensive measure of aggregate nominal spending; it does not have […]

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OPEN-ECONOMY MARKET: Existing Arguments for NIT 2

The target inflation rate would be more accurately achieved than with monetary aggregate targets, the argument goes, because advance knowledge of average velocity growth would not be required. In addition, real output and employment fluctuations might be smaller on average than with pure inflation targeting because of the implied response of the rule to unusually […]

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OPEN-ECONOMY MARKET: Existing Arguments for NIT

To a considerable extent, the case for NIT as developed in the early 1980s grew naturally from a perception that the then-prominent strategy of monetary aggregate targeting could be improved upon. Large and unpredictable changes in payments industry technology and regulatory practices had led to well-publicized instability in the short-run relationships between monetary aggregates, such […]

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OPEN-ECONOMY MARKET: Introduction

The purpose of this paper is to examine the merits of monetary policy rules that utilize as their principal target variable the level or growth rate of some aggregate measure of nominal spending, such as nominal GDP, rather than a monetary aggregate or an index of inflation (either alone or in combination with some measure […]

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ASSET PRICING MODEL: Concluding remarks 3

The economically feasible set for firm i reflects the fact that no investor wants to enter negative NPV investments at date 1 read only:

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