The Macro-Share Economy and Nominal GDP Targeting

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.