Enhancing resilience with natural growth targeting
Name
Southern Economic Journal - 2025 - Orphanides - Enhancing resilience with natural growth targeting.pdf
Size
2.24 MB
Format
Adobe PDF
Checksum (MD5)
577d4256bbe25be3c73b43d0c62d9665
Author(s)
Orphanides, Athanasios
Date Issued
February 18, 2025
Journal
Southern Economic Journal
Publisher
Wiley
Citation
Orphanides, A. (2025). Enhancing resilience with natural growth targeting. Southern Economic Journal, 91(4), 1420–1439.
Version
Final published version
Abstract
Despite a number of helpful changes, including the adop-tion of an inflation target, the Fed's monetary policy strat-egy proved insufficiently resilient in recent years. Whilethe Fed eased policy appropriately during the pandemic,it fell behind the curve during the post-pandemic recov-ery. During 2021, the Fed kept easing policy while theinflation outlook was deteriorating and the economy wasgrowing considerably faster than the economy's naturalgrowth rate—the sum of the Fed's 2% inflation goal andthe growth rate of potential output. The resilience of theFed's monetary policy strategy could be enhanced, andsuch errors be avoided with guidance from a simple natu-ral growth targeting rule that prescribes that the federalfunds rate during each quarter be raised (cut) when pro-jected nominal income growth exceeds (falls short) of theeconomy's natural growth rate. An illustration with real-time data and forecasts since the early 1990s shows thatFed policy has not persistently deviated from this simplerule with the notable exception of the period coincidingwith the Fed's post-pandemic policy error.
MIT Department
Sloan School of Management
Terms of Use
Creative Commons Attribution-NonCommercial-NoDerivatives
Persistent DSpace Link
DOI of Published Version
https://doi.org/10.1002/soej.12752
