Nominal income and inflation targeting

Abstract

In this paper a macro- economic model in the area of monetary policy game theory is extended to one-sided dismissal rules concerning observed nominal output and inflation targets for the central banker. These rules specify firing the central banker if some observed policy targets have been exceeded. Such rules are shown to reduce inflationary bias if the central banker perceives her reappointment chances as being strong and is preferred to discretionary monetary policy. Various policy targets are considered and it is shown that nominal output targeting may be preferred to inflation targeting under certain conditions.