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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. Richard Clarida & Jordi Gali & Mark Gertler, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," NBER Working Papers 7147, National Bureau of Economic Research, Inc.
  2. Carl E. Walsh, 2003. "Monetary Theory and Policy, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232316, December.
  3. George Waters, 2011. "Dangers of commitment under rational expectations," Journal of Economics and Finance, Springer, vol. 35(4), pages 371-381, October.
  4. 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.
  5. anonymous, 2006. "Monetary policy report to the Congress," Web Site 7, Board of Governors of the Federal Reserve System (U.S.).
  6. Athanasios Orphanides & John C. Williams, 2005. "Monetary policy with imperfect knowledge," Working Paper Series 2005-17, Federal Reserve Bank of San Francisco.
  7. Athanasios Orphanides & John Williams, 2004. "Imperfect Knowledge, Inflation Expectations, and Monetary Policy," NBER Chapters, in: The Inflation-Targeting Debate, pages 201-246 National Bureau of Economic Research, Inc.
  8. 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, pages 277-316.
  9. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
  10. Waters, George A., 2007. "Regime changes, learning and monetary policy," Journal of Macroeconomics, Elsevier, vol. 29(2), pages 255-282, June.
  11. Jensen, Christian & McCallum, Bennett T., 2002. "The non-optimality of proposed monetary policy rules under timeless perspective commitment," Economics Letters, Elsevier, vol. 77(2), pages 163-168, October.
  12. Honkapohja, Seppo & Evans, George W., 2000. "Expectations and the stability problem for optimal monetary policies," Discussion Paper Series 1: Economic Studies 2000,10, Deutsche Bundesbank, Research Centre.
  13. anonymous, 2004. "Monetary policy report to the Congress," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Spr, pages 125-152.
  14. George W. Evans & Seppo Honkapohja, 1993. "Adaptive Forecasts," CEP Discussion Papers dp0135, Centre for Economic Performance, LSE.
  15. anonymous, 2004. "Asset prices and monetary policy," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 67, march.
  16. LokSang Ho, 2006. "Role Of Fiscal And Monetary Policy," Pacific Economic Review, Wiley Blackwell, vol. 11(1), pages 121-127, 02.
  17. anonymous, 2006. "Monetary policy report to the Congress," Web Site 6, Board of Governors of the Federal Reserve System (U.S.).
  18. Waters, George A., 2009. "Learning, Commitment, And Monetary Policy," Macroeconomic Dynamics, Cambridge University Press, vol. 13(04), pages 421-449, September.
  19. anonymous, 2004. "Monetary policy report to the Congress," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Sum, pages 266-288.
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