TITLE:
The Macro-Share Economy and Nominal GDP Targeting
AUTHORS:
David Eagle
KEYWORDS:
Component, Formatting, Style, Styling
JOURNAL NAME:
Theoretical Economics Letters,
Vol.7 No.7,
December
15,
2017
ABSTRACT: Using the Pareto criterion and competitive microfoundations,
this paper challenges the consensus’ focus on inflation control as the goal of monetary
economic policy. It is the price level, not inflation per se, that determines whether
a borrower or lender gains or loses. Pareto efficiency suggests that the goal of
monetary policy should be to minimize, not inflation risk, not even price-level
risk, but rather share risk. Share risk is the risk that a predetermined payment
as a share of the whole economy will differ from expectations. We conclude that
to minimize share risk, central banks should target nominal GDP. Minimizing share
risk also helps to minimize employment risk. We show this latter result using a
tautological relationship between three variables: 1) hours of employment, 2) the
average wage share of the economy, and 3) the percent of nominal GDP going to employee
compensation. We use US data on these three variables before, during, and after
the 2007-2008 Financial Crisis to study this relationship.