درباره هدف قرار دادن عملکرد درآمد اسمی به عنوان یک استراتژی برای سیاست پولی در یک اقتصاد کوچک باز

There is a great deal of support for nominal income targeting in the literature on strategies for monetary policy in a closed economy framework. Is nominal income targeting equally attractive in a small open economy? This paper compares nominal income targeting to alternative monetary policy rules in a stochastic macro model for a small open economy. We find that both the weighting in the overall price level of the exchange rate and foreign prices and the elasticity of output supplied with respect to the real exchange rate are important factors in assessing the attractiveness of nominal income targeting. In a small open economy where the size of both parameters is not negligible, a rule targeting the overall price level may actually be preferred to nominal income targeting.

The adoption of inflation targets by a number of central banks during the past decade seemed to run counter to the policy advice spelled out in the literature on monetary policy strategies in the 1980s and early 1990s. There appeared to be a reasonably strong consensus in the literature then that favored nominal income targeting as the most suitable monetary policy strategy.1 Thus, the decision by countries like Canada, New Zealand, Sweden, the United Kingdom and others to target inflation directly came somewhat as a surprise. In addition, the long-standing implicit form of inflation targeting pursued by Germany, Switzerland, Japan, and arguably the United States, appeared to be at odds with conventional wisdom. The divergence between what the literature hailed as the most suitable object of monetary policy and actual practice highlights the need for reassessing the argument for nominal income targeting. Much of the existing literature has focused on relatively closed economies.2 However, all of the economies that have adopted an explicit inflation target are relatively small open economies. There is thus reason to believe that the attractiveness of nominal income targeting in a closed economy may not carry over in full force to a small open economy. The evaluation of policy rules for closed economies has mainly focused on the attainment of domestic price and output stability. A small open economy has additional considerations. The stability of the exchange rate is important. Instability in the exchange rate leads to undesirable fluctuations in the pertinent price level, usually represented by a measure of prices of both domestic and foreign goods such as the Consumer Price Index. In addition, the degree of import penetration or openness is another factor that influences the choice of a strategy for monetary policy in a small open economy. In the existing literature on nominal income targeting, a few contributions3 do acknowledge the importance of the exchange rate in model specification and evaluation, but overall price level considerations and the degree of openness have not been addressed explicitly. In effect, this oversight has important implications for the accuracy of any assessment of the merits of nominal income targeting. This paper seeks to redress this oversight by examining the properties of nominal income targeting vis-à-vis exchange rate and overall price level targeting in the context of a small open economy. The role of the overall price level and other pertinent features such as openness and the sensitivity of aggregate supply to real exchange rate movements are emphasized in both model specification and evaluation. Doing so captures important aspects of small open economies that need to be recognized in the analysis of policy rules. Indeed, the findings reported in this paper provide an insight as to why small open economies may prefer inflation targeting to nominal income targeting. The appeal of inflation targeting is largely attributable to the fact that the strict adherence to a nominal income targeting rule may cause excessive fluctuations in the exchange rate and thus in the overall price level. These fluctuations become more pronounced under nominal income targeting as the degree of openness and the sensitivity of aggregate supply to swings in the real exchange rate increase. The remainder of the paper proceeds as follows. Section 2 introduces the small open economy model used in the paper. Section 3 discusses the criteria used in evaluating the performance of a particular monetary policy rule. This section also contains a graphical analysis of the properties of the different monetary policy rules considered in the paper. Finally, we attempt to reconcile our findings with inflation targeting in practice

This paper has compared the stabilizing properties of nominal income targeting to those of other strategies of monetary policy in a stochastic macro model for a small open economy. We find that the choice of the preferred policy rule depends on the source of uncertainty and the size of the parameters of the model, a standard result in the literature on monetary policy under uncertainty, which goes back to Poole (1970). In view of the difficulty in ranking the policy rules a priori, we evaluate the attractiveness of nominal income targeting vis-à-vis the alternative policy rules with the help of policy frontiers. We find that overall price level targeting may be preferable for a small open economy. This conclusion emerges after: 1. studying the effects on the performance of competing policy rules of the various disturbances that strike a small open economy and 2. assessing the effects on the performance of the competing policy rules of changes in the size of parameters deemed important in small open economies: the weight on the domestic currency price of imported goods in the overall price level and the elasticity of output supplied with respect to the real exchange rate. Taken altogether, the findings reported in this paper imply that the theoretical case for nominal income targeting is weaker within the framework of a small open economy. The benefits of domestic price and output stabilization are offset by the cost of the displacement of the exchange rate in achieving stability in output and the general price level. Coupled with practical implementation problems and transparency issues, the notion that nominal income targeting would prove to be the preferred policy for a small open economy is questionable.