Inflation Targeting or Nominal GDP Targeting: the Way Forward for the Developed Central Banks

One of the after-effects of the Great Recession 2007-2009, asides slower recovery of economies, is the renaissance of the debate over monetary policy frameworks. In recent times, monetarists like Scott Sumner propose Nominal Gross Domestic Product (NGDP) Targeting as an alternative to the existing framework, i.e. inflation targeting. Automatically, researchers like ourselves hazard to question whether there is truly a need for an alternative framework, and whether or not a change in monetary policy framework may avoid another possible reoccurrence of future Recessions The present study provides empirical comparisons for both frameworks. We evaluate and compare the stability power of monetary policy with respect to prices and output under both targeting regimes after the economy is exposed to an external shock, in particular, an oil shock. We make our analysis for a sample of developed economies within the domain of an Interacted Panel Vector Auto regression (IPVAR) technique. We identify how macroeconomic conditions vary with monetary policy responses when operating under different policy frameworks. Our findings suggest that the stability performance of monetary policy is stronger when operating under NGDP targeting in and out of a recession. Keywords: Monetary policy, Nominal Gross Domestic Product (NGDP) Targeting, Inflation Targeting, developed economies, Interacted Panel Vector Auto regression (IPVAR), recession, oil shock