Nominal GDP Targeting with Heterogeneous Labor Supply

We study nominal GDP targeting as optimal monetary policy in a model with a credit market friction following Azariadis, Bullard, Singh and Suda (2018), henceforth ABSS. As in ABSS, the macroeconomy we study has considerable income inequality which gives rise to a large pri- vate sector credit market. Households participating in this market use non-state contingent nominal contracts (NSCNC). We extend the ABSS framework to allow for endogenous and heterogeneous household labor supply among credit market participant households. We show that nom- inal GDP targeting continues to characterize optimal monetary policy in this setting. Optimal monetary policy repairs the distortion caused by the credit market friction and so leaves heterogeneous households supply- ing their desired amount of labor, a type of divine coincidence result. We also analyze the incomplete markets equilibrium that exists when the monetary policymaker pursues a suboptimal policy, and show how an ex- tension to more general preferences can limit the ability of the policymaker to provide full insurance to households in this setting.