Price Level Targeting and Stabilization Policy

Berentsen, Aleksander; Waller, Christopher J.

doi:10.2139/ssrn.1444960

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Price Level Targeting and Stabilization Policy

FRB of St. Louis Working Paper No. 2009-033B

37 Pages Posted: 8 Aug 2009 Last revised: 1 Nov 2009

See all articles by Aleksander Berentsen

Aleksander Berentsen

University of Basel - Faculty of Business and Economics; CESifo (Center for Economic Studies and Ifo Institute)

Christopher J. Waller

Federal Reserve Banks - Federal Reserve Bank of St. Louis; University of Notre Dame - Department of Economics

Date Written: October 28, 2009

Abstract

We construct a dynamic stochastic general equilibrium model to study optimal monetary stabilization policy. Prices are fully flexible and money is essential for trade. Our main result is that if the central bank pursues a price-level target, it can control inflation expectations and improve welfare by stabilizing short-run shocks to the economy. The optimal policy involves smoothing nominal interest rates which effectively smooths consumption across states.

Keywords: Money, Stabilization, Search

JEL Classification: E40, E50

Suggested Citation: Suggested Citation

Berentsen, Aleksander and Waller, Christopher J., Price Level Targeting and Stabilization Policy (October 28, 2009). FRB of St. Louis Working Paper No. 2009-033B, Available at SSRN: https://ssrn.com/abstract=1444960 or http://dx.doi.org/10.2139/ssrn.1444960