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Comparing inflation and price level targeting: the role of forward guidance and transparency

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  • Honkapohja, Seppo
  • Mitra, Kaushik

Abstract

We examine global dynamics under learning in New Keynesian models with price level targeting that is subject to the zero lower bound. The role of forward guidance is analyzed under transparency about the policy rule. Properties of transparent and non-transparent regimes are compared to each other and to the corresponding cases of inflation targeting. Robustness properties for different regimes are examined in terms of the domain of attraction of the targeted steady state and volatility of inflation, output and interest rate. We analyze the effect of higher inflation targets and large expectational shocks for the performance of these policy regimes.

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  • Honkapohja, Seppo & Mitra, Kaushik, 2015. "Comparing inflation and price level targeting: the role of forward guidance and transparency," Bank of Finland Research Discussion Papers 9/2015, Bank of Finland.
    • Handle: RePEc:zbw:bofrdp:rdp2015_009
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    Cited by:

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    2. André Marine Charlotte & Dai Meixing, 2018. "Learning, robust monetary policy and the merit of precaution," The B.E. Journal of Macroeconomics, De Gruyter, vol. 18(2), pages 1-20, June.
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    6. Crowley, Patrick M. & Trombley, Christopher, 2015. "Are monetary unions more synchronous than non-monetary unions?," Research Discussion Papers 11/2015, Bank of Finland.
    7. repec:zbw:bofrdp:urn:nbn:fi:bof-201512101465 is not listed on IDEAS
    8. Goy, Gavin & Hommes, Cars & Mavromatis, Kostas, 2022. "Forward guidance and the role of central bank credibility under heterogeneous beliefs," Journal of Economic Behavior & Organization, Elsevier, vol. 200(C), pages 1240-1274.
    9. Daron Acemoglu & Ufuk Akcigit & Douglas Hanley & William Kerr, 2016. "Transition to Clean Technology," Journal of Political Economy, University of Chicago Press, vol. 124(1), pages 52-104.
    10. Eerola, Essi & Saarimaa, Tuukka, 2015. "Who Benefits from Public Housing?," Working Papers 68, VATT Institute for Economic Research.
    11. Honkapohja, Seppo & Mitra, Kaushik, 2020. "Price level targeting with evolving credibility," Journal of Monetary Economics, Elsevier, vol. 116(C), pages 88-103.
    12. repec:bof:bofrdp:urn:nbn:fi:bof-201512171488 is not listed on IDEAS
    13. Cole, Stephen J., 2018. "The effectiveness of central bank forward guidance under inflation and price-level targeting," Journal of Macroeconomics, Elsevier, vol. 55(C), pages 146-161.
    14. Salle, Isabelle L., 2023. "What to target? Insights from a lab experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 212(C), pages 514-533.
    15. repec:bof:bofrdp:urn:nbn:fi:bof-201508041349 is not listed on IDEAS
    16. Cole, Stephen J., 2020. "The influence of learning and price-level targeting on central bank forward guidance," Journal of Macroeconomics, Elsevier, vol. 65(C).
    17. repec:zbw:bofrdp:urn:nbn:fi:bof-201508041349 is not listed on IDEAS
    18. Eerola, Essi & Saarimaa, Tuukka, 2015. "Who Benefits from Public Housing?," Working Papers 68, VATT Institute for Economic Research.
    19. repec:bof:bofrdp:urn:nbn:fi:bof-201512101465 is not listed on IDEAS
    20. Carola Conces Binder, 2021. "Central Bank Communication and Disagreement about the Natural Rate Hypothesis," International Journal of Central Banking, International Journal of Central Banking, vol. 17(2), pages 81-123, June.
    21. Crowley, Patrick M. & Trombley, Christopher, 2015. "Are monetary unions more synchronous than non-monetary unions?," Bank of Finland Research Discussion Papers 11/2015, Bank of Finland.
    22. Gavin Goy & Cars Homme & Kostas Mavromatis, 2018. "Forward Guidance and the Role of Central Bank Credibility," DNB Working Papers 614, Netherlands Central Bank, Research Department.
    23. repec:zbw:bofrdp:2015_011 is not listed on IDEAS

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    More about this item

    JEL classification:

    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • 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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