Inflation expectations and the stability properties of nominal GDP targeting

Ball (1999) uses a small closed economy model to show that nominal GDP targ eting can lead to instability. This I,paper extends Ball's model to uncover die role inflation expectations play in generating this instability. Allow ing inflation expectations to be formed by die more general mixed expectati ons process, which encompasses Ball's model, we show that nominal GDP targe ting is unlikely to lead to instability. We further show that in Ball's mod el where exact targeting causes instability that moving to inexact targetin g restores stability.