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Careful price level targeting

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  • Waters , George A.

    ()
    (Department of Economics, Illinois State University)

Abstract

This paper examines a class of interest rate rules that respond to public expectations and to lagged variables. Varying levels of commitment correspond to varying degrees of response to lagged output and targeting of the price level. If the response rises (unintentionally) above the optimal level, the outcome deteriorates severely. Hence, the optimal level of commitment is sensitive to the method of expectations formation and partial commitment is the robust, optimal policy.

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File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/BoF_DP_1230.pdf
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Bibliographic Info

Paper provided by Bank of Finland in its series Research Discussion Papers with number 30/2012.

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Length: 11 pages
Date of creation: 26 Oct 2012
Date of revision:
Handle: RePEc:hhs:bofrdp:2012_030

Contact details of provider:
Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.suomenpankki.fi/en/
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Related research

Keywords: learning; monetary policy; interest rate rules; commitment; price level targeting;

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References

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  1. Christian Jensen & Bennett C. McCallum, 2002. "The Non-Optimality of Proposed Monetary Policy Rules Under Timeless-Perspective Commitment," NBER Working Papers 8882, National Bureau of Economic Research, Inc.
  2. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
  3. George W. Evans & Seppo Honkapohja, 2001. "Expectations and the Stability Problem for Optimal Monetary Policies," University of Oregon Economics Department Working Papers, University of Oregon Economics Department 2001-6, University of Oregon Economics Department, revised 03 Aug 2001.
  4. Carl E. Walsh, 2003. "Monetary Theory and Policy, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232316, December.
  5. Robert J. Barro & David B. Gordon, 1981. "A Positive Theory of Monetary Policy in a Natural-Rate Model," NBER Working Papers 0807, National Bureau of Economic Research, Inc.
  6. Richard Clarida & Jordi Galí & Mark Gertler, 1997. "Monetary policy rules and macroeconomic stability: Evidence and some theory," Economics Working Papers 350, Department of Economics and Business, Universitat Pompeu Fabra, revised May 1999.
  7. Michael Woodford, 1999. "Commentary : how should monetary policy be conducted in an era of price stability?," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City, pages 277-316.
  8. Athanasios Orphanides & John C. Williams, 2006. "Monetary Policy with Imperfect Knowledge," Journal of the European Economic Association, MIT Press, MIT Press, vol. 4(2-3), pages 366-375, 04-05.
  9. George W. Evans & Seppo Honkapohja, 1993. "Adaptive Forecasts," CEP Discussion Papers dp0135, Centre for Economic Performance, LSE.
  10. anonymous, 2004. "Monetary policy report to the Congress," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), Board of Governors of the Federal Reserve System (U.S.), issue Sum, pages 266-288.
  11. Waters, George A., 2009. "Learning, Commitment, And Monetary Policy," Macroeconomic Dynamics, Cambridge University Press, Cambridge University Press, vol. 13(04), pages 421-449, September.
  12. Athanasios Orphanides & John C. Williams, 2002. "Imperfect knowledge, inflation expectations, and monetary policy," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2002-27, Board of Governors of the Federal Reserve System (U.S.).
  13. anonymous, 2004. "Monetary policy report to the Congress," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), Board of Governors of the Federal Reserve System (U.S.), issue Spr, pages 125-152.
  14. anonymous, 2006. "Monetary policy report to the Congress," Web Site 6, Board of Governors of the Federal Reserve System (U.S.).
  15. anonymous, 2004. "Asset prices and monetary policy," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 67, march.
  16. George Waters, 2011. "Dangers of commitment under rational expectations," Journal of Economics and Finance, Springer, Springer, vol. 35(4), pages 371-381, October.
  17. LokSang Ho, 2006. "Role Of Fiscal And Monetary Policy," Pacific Economic Review, Wiley Blackwell, Wiley Blackwell, vol. 11(1), pages 121-127, 02.
  18. anonymous, 2006. "Monetary policy report to the Congress," Web Site 7, Board of Governors of the Federal Reserve System (U.S.).
  19. Waters, George A., 2007. "Regime changes, learning and monetary policy," Journal of Macroeconomics, Elsevier, Elsevier, vol. 29(2), pages 255-282, June.
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