Nominal GDP Targeting With Heterogeneous Labor Supply
2017
We study nominal GDP targeting as optimal monetary policy in a
model with a credit market friction following Azariadis, Bullard, Singh
and Suda (2016), henceforth ABSS. As in ABSS, the macroeconomy we
study has considerable income inequality which gives rise to a large private sector credit market. Households participating in this market use
non-state contingent nominal contracts (NSCNC). We extend the ABSS
framework to allow for endogenous and heterogeneous household labor
supply among credit market participant households. We show that nominal GDP targeting continues to characterize optimal monetary policy in
this setting. Optimal monetary policy repairs the distortion caused by the
credit market friction and so leaves heterogeneous households supplying
their desired amount of labor, a type of “divine coincidence” result. We
also analyze the case when there is an aging population. We interpret
these findings in light of the recent debate in monetary policy concerning
labor force participation.
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