A simple empirical investigation into the optimal size of the NGDP Target and Level targeting

Ryan Murphy, Southern Methodist University
Jiawen Chen, Suffolk University


Abstract This paper constructs an index to study two questions within a growing school of macroeconomic thought, Market Monetarism. This school argues that the central bank has full control over all nominal variables in the economy and is solely responsible for aggregate demand management. To manage aggregate demand, Market Monetarism argues the central bank should target Nominal GDP. We address two issues of contention. First, we measure the optimal size of the optimal NGDP target. Second, we measure the extent to which central banks should engage in level targeting, i.e., whether central banks should correct for past errors when hitting their targets. We find evidence consistent with a five percent target but are unable to find consistent evidence regarding level targeting.