Bulletin of Economic Research
In the literature on monetary economics, there is the ‘inflationary bias’ result which predicts that the rate of inflation will be biased towards a higher level under discretionary monetary policy than under a rule‐based policy regime. It is established that a credible nominal target can eliminate this ‘inflationary bias’. In this paper, we examine the case of nominal GDP targeting, which is a rule‐based monetary regime. Depending on the degree of conservativeness by the central bank, we show in a stylized model the choice of different combination of inflation and real GDP targets can still result in an ‘inflationary bias’, and there also exists the possibility of a ‘dis‐inflationary bias’.
nominal GDP targeting