Targeting Nominal GDP or Prices: Guidance and Expectation Dynamics

51 Pages Posted: 5 Feb 2014 Last revised: 17 Mar 2014

See all articles by Seppo Honkapohja

Seppo Honkapohja

Centre for Economic Policy Research (CEPR); Aalto University School of Business; CESifo (Center for Economic Studies and Ifo Institute for Economic Research); Aalto University - School of Business

Kaushik Mitra

University of St. Andrews - School of Economics and Finance

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Date Written: March 14, 2014

Abstract

​We examine global dynamics under infinite-horizon learning in New Keynesian models where monetary policy practices either price-level or nominal GDP targeting and compare these regimes to inflation targeting. These interest-rate rules are subject to the zero lower bound. Robustness of the three rules in learning adjustment are compared using criteria for the domain of attraction of the targeted steady state, volatility of inflation and output and sensitivity to the speed of learning parameter. Performance of price-level and nominal GDP targeting significantly improves if the additional guidance in these regimes is incorporated in private agents’ learning.

Keywords: adaptive learning, monetary policy, inflation targeting, zero interest rate lower bound

JEL Classification: E63, E52, E58

Suggested Citation

Honkapohja, Seppo and Honkapohja, Seppo and Mitra, Kaushik, Targeting Nominal GDP or Prices: Guidance and Expectation Dynamics (March 14, 2014). Bank of Finland Research Discussion Paper No. 4/2014, Available at SSRN: https://ssrn.com/abstract=2390684 or http://dx.doi.org/10.2139/ssrn.2390684

Seppo Honkapohja (Contact Author)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Aalto University School of Business ( email )

, PO Box 21210
Aalto FI-00076
Finland

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Aalto University - School of Business

Finland

Kaushik Mitra

University of St. Andrews - School of Economics and Finance ( email )

Castlecliffe
Saint Andrews, Fife KY16 9SS
United Kingdom

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