Price-level versus inflation targeting with financial market imperfections
AbstractPrice-level targeting (PT) is compared with inflation targeting (IT) in a DSGE model augmented with imperfections in both debt and equity markets. The PT regime outperforms the IT regime, and the gain depends on the degree of financial market frictions. This is because inflation is better anchored under PT, owing to the expectation channel, and therefore the monetary authority has more leverage to deal with the financial market distortions. We also find that the gain is higher if the optimal rule reacts to asset prices instead of the output gap, and the rule requires a positive response to asset prices.
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Bibliographic InfoArticle provided by Canadian Economics Association in its journal Canadian Journal of Economics.
Volume (Year): 43 (2010)
Issue (Month): 4 (November)
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Other versions of this item:
- Francisco Covas & Yahong Zhang, 2008. "Price-Level versus Inflation Targeting with Financial Market Imperfections," Working Papers 08-26, Bank of Canada.
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
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