Targeting Nominal Income versus Targeting Price Level: A Target Zone Perspective

Abstract

Based on a simple stochastic macro model, this paper first addresses the relative stabilizing\r\nperformance between targeting nominal income and targeting money supply from the viewpoint of target zones. Similar to the conclusion found in Bean [Econ. J. 93 (1983) 803.] and in West [Econ. J. 96 (1986) 1077.], upon the shock of a change in commodity production, the elasticity of aggregate demand to real money balances is the crucial factor for the desirability of targeting nominal income. Second, comparing nominal income with price target zones, we find that, with the plausible parameter values, a price target zone policy is a better strategy for price stabilization. However, a nominal income target zone policy will be the better choice for output stabilization.