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Nominal GDP Targeting and the Zero Lower Bound: Should We Abandon Inflation Targeting?

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Author Info

  • Billi, Roberto M.

    ()
    (Research Department, Central Bank of Sweden)

Abstract

I compare nominal GDP level targeting to flexible inflation targeting in a small New Keynesian model subject to the zero lower bound on nominal policy rates. First, I study the performance of optimal discretionary policies. I find that, for a standard calibration, inflation targeting under discretion leaves the economy open to a deflationary trap. Nominal GDP level targeting under discretion, by contrast, provides a firm nominal anchor to the economy. Second, I study simple policy rules and the role of smoothing in the rules. With smoothing, a Taylor-type rule performs as well as a nominal GDP level rule. These result suggest that inflation targeting should not be ditched. Still, it can be improved significantly, by using policy rate smoothing to anchor inflation firmly.

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Bibliographic Info

Paper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 270.

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Length: 35 pages
Date of creation: 01 Jun 2013
Date of revision:
Handle: RePEc:hhs:rbnkwp:0270

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Related research

Keywords: nominal GDP target; optimal policy; simple rules; zero lower bound;

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  1. Roberto M. Billi, 2011. "Optimal Inflation for the US Economy," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(3), pages 29-52, July.
  2. Adam, Klaus & Billi, Roberto M., 2004. "Optimal monetary policy under commitment with a zero bound on nominal interest rates," CFS Working Paper Series 2004/13, Center for Financial Studies (CFS).
  3. Olivier Coibion & Yuriy Gorodnichenko & Johannes Wieland, 2010. "The Optimal Inflation Rate in New Keynesian Models," Working Papers 91, Department of Economics, College of William and Mary.
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