Scandinavian Working Papers in Economics

Working Paper Series,
Sveriges Riksbank (Central Bank of Sweden)

No 385: Unemployment Fluctuations and Nominal GDP Targeting

Roberto Billi ()
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Roberto Billi: Research Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden

Abstract: I evaluate the welfare performance of a target for the level of nominal GDP in a New Keynesian model with unemployment, accounting for a zero lower bound (ZLB) constraint on the nominal interest rate. Nominal GDP targeting is compared to employment targeting, a conventional Taylor rule, and the optimal monetary policy with commitment. I find that employment targeting is optimal when supply shocks are the source of fluctuations; however, facing demand shocks and the ZLB constraint, nominal GDP targeting can outperform substantially employment targeting.

Keywords: employment targeting; optimal monetary policy; Taylor rule; ZLB

JEL-codes: E24; E32; E52

26 pages, January 1, 2020

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