Nominal income targeting and monetary rules

The most familiar monetary rules, Friedman’s k-percent, McCallum’s feedback rule, and Taylor’s rule are studied in the context of nominal income targeting. With nominal income targeting as a benchmark, the focus of this chapter is how these monetary rules deviate, if they do, from targeting monetary equilibrium. This study includes a discussion of inflation targeting and the problem of discretion versus rules in monetary policy. The chapter concludes with a formal example of welfare loss when a policy maker deviates from the optimal path of its rule.