Journal Article

Optimal Monetary Policy for the Masses

Abstract: We study nominal GDP targeting as optimal monetary policy in a simple and stylized model with a credit market friction. The macroeconomy we study has considerable income inequality, which gives rise to a large private sector credit market. This is an important credit market friction because households participating in the credit market use non-state-contingent nominal contracts (NSCNC). We extend previous results in this model by allowing for substantial intra-cohort heterogeneity, which is substantial enough that we can approach measured Gini coefficients for income, financial wealth, and consumption in the U.S. data. We show that nominal GDP targeting continues to characterize optimal monetary policy in this setting. Optimal monetary policy repairs the distortion caused by the credit market friction, thereby leaving heterogeneous households supplying their desired amount of labor, a type of “divine coincidence” result. We also further characterize monetary policy in terms of nominal interest rate adjustment.

JEL Classification: E4; E5;

https://doi.org/10.20955/r.2025.10

Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Review

Publication Date: 2025-07-17

Volume: 107

Issue: 10