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Federal Reserve Bank of San Francisco
Working Paper Series
Instability under nominal GDP targeting: the role of expectations
Richard Dennis

Ball (1997) shows using a small closed economy model that nominal GDP targeting can lead to instability. This paper extends Ball's model to uncover the role inflation expectations play in generating this instability. By changing the process by which inflation expectations are formed in the short-run aggregate supply curve we show that nominal GDP targeting in either level or growth form does not generally result in instability. We further show that in Ball's (1997) case where exact targeting causes instability that moving to inexact targeting restores stability.

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Richard Dennis, Instability under nominal GDP targeting: the role of expectations, Federal Reserve Bank of San Francisco, Working Paper Series 2000-09, 2000.
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Keywords: Gross domestic product ; Inflation (Finance) ; Rational expectations (Economic theory)
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