Nominal GDP targeting and the tax burden

Recent work suggests that nominal GDP targeting may raise social welfare, but fiscal considerations have largely been ignored. We study an overlapping generations model with government debt and distortionary taxes. Nominal GDP targeting has two opposing effects on the tax burden: mean taxes increase, but tax volatility is reduced. Differently to previous works, we find that nominal GDP targeting lowers social welfare relative to inflation targeting. A key mechanism is that nominal GDP targeting makes inflation countercyclical, thereby raising long run inflation risk and consumption risk of retirees while increasing the inflation risk premium paid on government debt.