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The Perils of Nominal Targets

Author

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  • Roc Armenter

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.

Suggested Citation

  • Roc Armenter, 2018. "The Perils of Nominal Targets," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 85(1), pages 50-86.
    • Handle: RePEc:oup:restud:v:85:y:2018:i:1:p:50-86.
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    File URL: http://hdl.handle.net/10.1093/restud/rdx001
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    Citations

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    Cited by:

    1. Jeffrey Campbell & Jacob Weber, 2021. "Discretion rather than rules: Equilibrium uniqueness and forward guidance with inconsistent optimal plans," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 41, pages 243-254, July.
    2. Taisuke Nakata & Sebastian Schmidt, 2022. "Expectations-Driven Liquidity Traps: Implications for Monetary and Fiscal Policy," American Economic Journal: Macroeconomics, American Economic Association, vol. 14(4), pages 68-103, October.
    3. Zaretski, Aliaksandr, 2021. "Financial constraints, risk sharing, and optimal monetary policy," MPRA Paper 110757, University Library of Munich, Germany.
    4. Neri, Stefano, 2023. "Long-term inflation expectations and monetary policy in the euro area before the pandemic," European Economic Review, Elsevier, vol. 154(C).
    5. Corsello, Francesco & Neri, Stefano & Tagliabracci, Alex, 2021. "Anchored or de-anchored? That is the question," European Journal of Political Economy, Elsevier, vol. 69(C).
    6. He Nie & Jordan Roulleau-Pasdeloup, 2023. "The promises (and perils) of control-contingent forward guidance," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 49, pages 77-98, July.
    7. Ascari, Guido & Mavroeidis, Sophocles, 2022. "The unbearable lightness of equilibria in a low interest rate environment," Journal of Monetary Economics, Elsevier, vol. 127(C), pages 1-17.
    8. repec:zbw:bofrdp:2021_014 is not listed on IDEAS
    9. Sascha Möhrle & Timo Wollmershäuser, 2020. "About the Looming De-anchoring of Inflation Expectations in the Eurozone and the ECB’s Room for Maneuver," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 73(10), pages 30-32, October.
    10. Gino Cateau & Malik Shukayev, 2022. "Limited commitment, endogenous credibility and the challenges of price‐level targeting," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 55(4), pages 1834-1861, November.
    11. Nakata, Taisuke & Schmidt, Sebastian, 2019. "Conservatism and liquidity traps," Journal of Monetary Economics, Elsevier, vol. 104(C), pages 37-47.
    12. Christian Pfister & Jean-Guillaume Sahuc, 2020. "Unconventional monetary policies: A stock-taking exercise," Revue d'économie politique, Dalloz, vol. 130(2), pages 137-169.
    13. Jordi Galí, 2018. "The State of New Keynesian Economics: A Partial Assessment," Journal of Economic Perspectives, American Economic Association, vol. 32(3), pages 87-112, Summer.
    14. Harrison, Richard & Waldron, Matt, 2021. "Optimal policy with occasionally binding constraints: piecewise linear solution methods," Bank of England working papers 911, Bank of England.
    15. Manuel Amador & Javier Bianchi, 2023. "Helicopter Drops and Liquidity Traps," NBER Working Papers 31046, National Bureau of Economic Research, Inc.
    16. Tom D. Holden, 2023. "Existence and Uniqueness of Solutions to Dynamic Models with Occasionally Binding Constraints," The Review of Economics and Statistics, MIT Press, vol. 105(6), pages 1481-1499, November.
    17. Florin O. Bilbiie, 2022. "Neo-Fisherian Policies and Liquidity Traps," American Economic Journal: Macroeconomics, American Economic Association, vol. 14(4), pages 378-403, October.
    18. Lansing, Kevin J., 2021. "Endogenous forecast switching near the zero lower bound," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 153-169.
    19. Hills, Timothy S. & Nakata, Taisuke & Schmidt, Sebastian, 2019. "Effective lower bound risk," European Economic Review, Elsevier, vol. 120(C).
    20. Rodríguez Arosemena, Nicolás, 2018. "The Dominium Mundi Game and the Case for Artificial Intelligence in Economics and the Law," MPRA Paper 90560, University Library of Munich, Germany.
    21. Eo, Yunjong & McClung, Nigel, 2021. "Determinacy and E-stability with interest rate rules at the zero lower bound," Research Discussion Papers 14/2021, Bank of Finland.
    22. Eo, Yunjong & McClung, Nigel, 2021. "Determinacy and E-stability with interest rate rules at the zero lower bound," Bank of Finland Research Discussion Papers 14/2021, Bank of Finland.

    More about this item

    Keywords

    Inflation targeting; Zero lower bound; Markov equilibria;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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