Nominal GDP Targeting for Developing Countries

32 Pages Posted: 2 Feb 2015 Last revised: 6 Feb 2023

See all articles by Pranjul Bhandari

Pranjul Bhandari

Harvard University

Jeffrey A. Frankel

Harvard University - Harvard Kennedy School (HKS); National Bureau of Economic Research (NBER)

Date Written: January 2015

Abstract

The revival of interest in nominal GDP (NGDP) targeting has come in the context of large advanced economies. We consider the case for NGDP targeting for mid-sized developing countries, in light of their susceptibility to supply shocks and terms of trade shocks. For India, in particular, one major exogenous supply shock is the monsoon rains. NGDP targeting splits the impact of supply shocks automatically between inflation and real GDP growth. In the case of annual inflation targeting (IT), by contrast, the full impact of an adverse supply shock or terms of trade shock is felt as a loss in real GDP alone. NGDP targeting automatically accommodates supply shocks as most central banks with discretion would do anyway, while retaining the advantage of anchoring expectations as rules are designed to do. We outline a simple theoretical model and derive the condition under which an NGDP targeting regime would dominate other regimes such as annual IT for achieving objectives of output and price stability. We go on to estimate for the case of India the parameters needed to ascertain whether the condition holds, particularly the slope of the aggregate supply curve. Estimates suggest that the condition may indeed hold.

Suggested Citation

Bhandari, Pranjul and Frankel, Jeffrey A., Nominal GDP Targeting for Developing Countries (January 2015). NBER Working Paper No. w20898, Available at SSRN: https://ssrn.com/abstract=2558950

Pranjul Bhandari (Contact Author)

Harvard University ( email )

Jeffrey A. Frankel

Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
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United States
617-496-3834 (Phone)
617-496-5747 (Fax)

HOME PAGE: http://www.ksg.harvard.edu/fs/jfrankel

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