A “New Keynesian” paper from the libertarian CATO Institute?

A generally great organization.
A generally great organization.

We regard Keynesianism as the ideological cover for crony capitalism (really the same system) and therefore find it odd that CATO, a libertarian group, would support work that we would expect to come from Keynesian/ anti-libertarian economists such as Robert Shiller or Paul Krugman.

No one is perfect we suppose.

(From CATO)

This paper evaluates the welfare properties of nominal GDP targeting in the context of a New Keynesian model with both price and wage rigidity. In particular, we compare nominal GDP targeting to inflation and output gap targeting as well as to a conventional Taylor rule. These comparisons are made on the basis of welfare losses relative to a hypothetical equilibrium with flexible prices and wages. Output gap targeting is the most desirable of the rules under consideration, but nominal GDP targeting performs almost as well. Nominal GDP targeting is associated with smaller welfare losses than a Taylor rule and significantly outperforms inflation targeting. Relative to inflation targeting and a Taylor rule, nominal GDP targeting performs best conditional on supply shocks and when wages are sticky relative to prices. Nominal GDP targeting may outperform output gap targeting if the gap is observed with noise, and has more desirable properties related to equilibrium determinacy than does gap targeting.

Click here for the paper.

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