The Perils of Nominal Targets

53 Pages Posted: 11 Nov 2016

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: 2016-11-10

Abstract

A monetary authority can be committed to pursuing an inflation, price-level, or nominal-GDP target yet systematically fail to achieve the prescribed goal. Constrained by the zero lower bound on the policy rate, the monetary authority is unable to implement its objectives when private-sector expectations stray far enough from the target. Low-inflation expectations become self-fulfilling, resulting in an additional Markov equilibrium in which the monetary authority falls short of the nominal target, average output is below its efficient level, and the policy rate is typically low. Introducing a stabilization goal for long-term nominal rates can implement a unique Markov equilibrium without fully compromising stabilization policy.

Keywords: inflation targeting, zero lower bound, Markov equilibria

JEL Classification: E52, E58

Suggested Citation

Armenter, Roc, The Perils of Nominal Targets (2016-11-10). FRB of Philadelphia Working Paper No. 16-30. Available at SSRN: https://ssrn.com/abstract=2867843

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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