The Perils of Nominal Targets

34 Pages Posted: 17 Dec 2013

See all articles by Roc Armenter

Roc Armenter

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Multiple version iconThere are 2 versions of this paper

Date Written: December 10, 2013

Abstract

A monetary authority can be committed to pursuing an inflation, price-level, or nominal output target yet systematically fail to achieve the specified goals. Constrained by the zero lower bound on the policy rate, the monetary authority is unable to implement its objectives when private-sector expectations stray away from the target in the first place. Low-inflation expectations become self-fulfilling, leading to multiple Markov equilibria. Private-sector expectations are anchored on a unique Markov equilibrium if the monetary authority is given a strong stabilization goal for the policy rate. However, policy-rate stabilization may not improve welfare as the resulting policy is severely distorted.

Keywords: Markov equilibrium, Inflation, Monetary policy, Nominal targets

Suggested Citation

Armenter, Roc, The Perils of Nominal Targets (December 10, 2013). FRB of Philadelphia Working Paper No. 14-2. Available at SSRN: https://ssrn.com/abstract=2368471 or http://dx.doi.org/10.2139/ssrn.2368471

Roc Armenter (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

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