IDEAS home Printed from https://ideas.repec.org/p/fip/fedlwp/2017-016.html
   My bibliography  Save this paper

Nominal GDP Targeting With Heterogeneous Labor Supply

Author

Abstract

We study nominal GDP targeting as optimal monetary policy in a model with a credit market friction following Azariadis, Bullard, Singh and Suda (2018), 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 incomplete markets equilibrium that exists when the monetary policymaker pursues a suboptimal policy, and show how an extension to more general preferences can limit the ability of the policymaker to provide full insurance to households in this setting.

Suggested Citation

  • James B. Bullard & Aarti Singh, 2017. "Nominal GDP Targeting With Heterogeneous Labor Supply," Working Papers 2017-16, Federal Reserve Bank of St. Louis.
    • Handle: RePEc:fip:fedlwp:2017-016
    DOI: 10.20955/wp.2017.016
    as

    Download full text from publisher

    File URL: https://doi.org/10.20955/wp.2017.016
    File Function: https://doi.org/10.20955/wp.2017.016
    Download Restriction: no
    File URL: https://s3.amazonaws.com/real.stlouisfed.org/wp/2017/2017-016.pdf
    File Function: Full text
    Download Restriction: no
    File URL: https://libkey.io/10.20955/wp.2017.016?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Zhigang Feng & Matthew Hoelle, 2017. "Indeterminacy in stochastic overlapping generations models: real effects in the long run," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 63(2), pages 559-585, February.
    2. Olivier Blanchard & Jordi Galí, 2010. "Labor Markets and Monetary Policy: A New Keynesian Model with Unemployment," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(2), pages 1-30, April.
    3. Gauti B. Eggertsson & Neil R. Mehrotra, 2014. "A Model of Secular Stagnation," NBER Working Papers 20574, National Bureau of Economic Research, Inc.
    4. Miles, David, 1999. "Modelling the Impact of Demographic Change upon the Economy," Economic Journal, Royal Economic Society, vol. 109(452), pages 1-36, January.
    5. Christopher J. Erceg & Andrew T. Levin, 2014. "Labor Force Participation and Monetary Policy in the Wake of the Great Recession," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(S2), pages 3-49, October.
    6. Kevin D. Sheedy, 2014. "Debt and Incomplete Financial Markets: A Case for Nominal GDP Targeting," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 45(1 (Spring), pages 301-373.
    7. Yunus Aksoy & Henrique S. Basso & Ron P. Smith & Tobias Grasl, 2019. "Demographic Structure and Macroeconomic Trends," American Economic Journal: Macroeconomics, American Economic Association, vol. 11(1), pages 193-222, January.
    8. Azariadis, Costas & Bullard, James & Singh, Aarti & Suda, Jacek, 2019. "Incomplete credit markets and monetary policy," Journal of Economic Dynamics and Control, Elsevier, vol. 103(C), pages 83-101.
    9. Sterk, Vincent & Tenreyro, Silvana, 2018. "The transmission of monetary policy through redistributions and durable purchases," Journal of Monetary Economics, Elsevier, vol. 99(C), pages 124-137.
    10. Robert Hall & Nicolas Petrosky-Nadeau, 2016. "Changes in labor participation and household income," FRBSF Economic Letter, Federal Reserve Bank of San Francisco.
    11. Stephanie Aaronson & Tomaz Cajner & Bruce Fallick & Felix Galbis-Reig & Christopher Smith & William Wascher, 2014. "Labor Force Participation: Recent Developments and Future Prospects," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 45(2 (Fall)), pages 197-275.
    12. Stephanie Aaronson & Bruce Fallick & Andrew Figura & Jonathan Pingle & William Wascher, 2006. "The Recent Decline in the Labor Force Participation Rate and Its Implications for Potential Labor Supply," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 37(1), pages 69-154.
    13. Nucci, Francesco & Riggi, Marianna, 2018. "Labor force participation, wage rigidities, and inflation," Journal of Macroeconomics, Elsevier, vol. 55(C), pages 274-292.
    14. Alan B. Krueger, 2017. "Where Have All the Workers Gone? An Inquiry into the Decline of the U.S. Labor Force Participation Rate," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 48(2 (Fall)), pages 1-87.
    15. Willem Van Zandweghe, 2012. "Interpreting the recent decline in labor force participation," Economic Review, Federal Reserve Bank of Kansas City, vol. 97(Q I), pages 5-34.
    16. Julie L. Hotchkiss & Fernando Rios-Avila, 2013. "Identifying Factors behind the Decline in the U.S. Labor Force Participation Rate," Business and Economic Research, Macrothink Institute, vol. 3(1), pages 257-275, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Lars E.O. Svensson, 2020. "Monetary Policy Strategies for the Federal Reserve," International Journal of Central Banking, International Journal of Central Banking, vol. 16(1), pages 133-193, February.
    2. Azariadis, Costas & Bullard, James & Singh, Aarti & Suda, Jacek, 2019. "Incomplete credit markets and monetary policy," Journal of Economic Dynamics and Control, Elsevier, vol. 103(C), pages 83-101.
    3. James B. Bullard & Riccardo DiCecio, 2019. "Optimal Monetary Policy for the Masses," Working Papers 2019-009, Federal Reserve Bank of St. Louis, revised 25 Jul 2023.
    4. Nicolás Cachanosky, 2021. "Microfoundations and macroeconomics: 20 years," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 34(2), pages 279-288, June.
    5. Nicolás Cachanosky, 0. "Microfoundations and macroeconomics: 20 years," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 0, pages 1-10.
    6. Alessandro Cantelmo & Nikos Fatouros & Giovanni Melina & Chris Papageorgiou, 2024. "Monetary Policy Under Natural Disaster Shocks," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 65(3), pages 1441-1497, August.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Francisco Perez‐Arce & María J. Prados, 2021. "The Decline In The U.S. Labor Force Participation Rate: A Literature Review," Journal of Economic Surveys, Wiley Blackwell, vol. 35(2), pages 615-652, April.
    2. Francisco Perez-Arce & Maria J. Prados & Tarra Kohli, 2018. "The Decline in the U.S. Labor Force Participation Rate," Working Papers wp385, University of Michigan, Michigan Retirement Research Center.
    3. James B. Bullard & Riccardo DiCecio, 2019. "Optimal Monetary Policy for the Masses," Working Papers 2019-009, Federal Reserve Bank of St. Louis, revised 25 Jul 2023.
    4. Matteo G Richiardi & Brian Nolan & Lane Kenworthy, 2020. "What happened to the ‘Great American Jobs Machine’?," International Journal of Microsimulation, International Microsimulation Association, vol. 13(1), pages 19-51.
    5. Stephanie Aaronson & Tomaz Cajner & Bruce Fallick & Felix Galbis-Reig & Christopher Smith & William Wascher, 2014. "Labor Force Participation: Recent Developments and Future Prospects," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 45(2 (Fall)), pages 197-275.
    6. Nucci, Francesco & Riggi, Marianna, 2018. "Labor force participation, wage rigidities, and inflation," Journal of Macroeconomics, Elsevier, vol. 55(C), pages 274-292.
    7. Garriga, Carlos & Kydland, Finn E. & Šustek, Roman, 2016. "Nominal rigidities in debt and product markets," LSE Research Online Documents on Economics 86223, London School of Economics and Political Science, LSE Library.
    8. John G. Fernald & Robert E. Hall & James H. Stock & Mark W. Watson, 2017. "The Disappointing Recovery of Output after 2009," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 48(1 (Spring), pages 1-81.
    9. Galo Nuño & Carlos Thomas, 2020. "Optimal Monetary Policy with Heterogeneous Agents," CESifo Working Paper Series 8670, CESifo.
    10. David H. Bernstein & Andrew B. Martinez, 2021. "Jointly Modeling Male and Female Labor Participation and Unemployment," Econometrics, MDPI, vol. 9(4), pages 1-14, December.
    11. Christopher J. Erceg & Andrew T. Levin, 2014. "Labor Force Participation and Monetary Policy in the Wake of the Great Recession," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(S2), pages 3-49, October.
    12. Krzysztof Bartosik, 2020. "Świadczenia pieniężne na rzecz dzieci a podaż pracy kobiet w krajach OECD," Gospodarka Narodowa. The Polish Journal of Economics, Warsaw School of Economics, issue 3, pages 83-110.
    13. James B. Bullard, 2014. "The rise and fall of labor force participation in the United States," Review, Federal Reserve Bank of St. Louis, vol. 96(1), pages 1-12.
    14. David G. Blanchflower & Andrew T. Levin, 2015. "Labor Market Slack and Monetary Policy," NBER Working Papers 21094, National Bureau of Economic Research, Inc.
    15. Garriga, Carlos & Kydland, Finn E. & Šustek, Roman, 2016. "Nominal rigidities in debt and product markets," LSE Research Online Documents on Economics 86223, London School of Economics and Political Science, LSE Library.
    16. Idriss Fontaine, 2021. "Uncertainty and Labour Force Participation," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 83(2), pages 437-471, April.
    17. Danny Yagan, 2019. "Employment Hysteresis from the Great Recession," Journal of Political Economy, University of Chicago Press, vol. 127(5), pages 2505-2558.
    18. Adrien Auclert, 2019. "Monetary Policy and the Redistribution Channel," American Economic Review, American Economic Association, vol. 109(6), pages 2333-2367, June.
    19. Shannon Bold & Laurence Harris, 2018. "Identifying monetary policy rules in South Africa with inflation expectations and unemployment," WIDER Working Paper Series wp-2018-43, World Institute for Development Economic Research (UNU-WIDER).

    More about this item

    Keywords

    Non-state contingent nominal contracting; optimal monetary policy; nominal GDP targeting; life cycle economies; heterogeneous households; credit market participation; labor supply;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedlwp:2017-016. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Anna Oates (email available below). General contact details of provider: https://edirc.repec.org/data/frbslus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.