Targeting Nominal GDP or Prices: Guidance and Expectation Dynamics
51 Pages Posted: 5 Feb 2014 Last revised: 17 Mar 2014
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Targeting Nominal GDP or Prices: Guidance and Expectation Dynamics
Targeting Nominal GDP or Prices: Guidance and Expectation Dynamics
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: Suggested Citation