| Abstract: | This paper examines the welfare implications of a nominal GDP growth targeting rule, a nominal GDP level targeting rule, and inflation targeting regime in a New Keynesian model featuring positive trend inflation, two measures of welfare, and both high and low growth environments. The paper finds that (i) in general, nominal GDP growth targeting dominates other rules with changes in all dimensions; (ii) nominal GDP growth targeting framework is superior to the level targeting regime for most scenarios; (iii) inflation targeting is preferred to nominal GDP level targeting regime, but to minimize short-run fluctuations, the latter is advantageous; (iv) nominal GDP level targeting may be desirable only in a low growth environment with both low inflation indexation and consumption equivalence criteria. The simulation results provide solid evidence to policy makers on the desirability of nominal GDP growth targeting. |
