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Price level targeting and risk management

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  • Billi, Roberto M.

Abstract

The desirability of a nominal-level target during zero lower bound (ZLB) episodes has become a relevant topic for central bankers and academics. In such a context, this article studies the effects of uncertainty about the future state of the economy on the performance of strict-price-level targeting versus nominal-GDP-level targeting. These targeting frameworks are compared in a small New Keynesian model, which offers a clear illustration of the tradeoffs faced by the central bank. The analysis shows that uncertainty about the future hampers economic performance to a greater extent under nominal-GDP-level targeting, relative to strict-price-level targeting. The reason is that strict-price-level targeting induces greater policy inertia and, therefore, improves the tradeoffs faced by the central bank during ZLB episodes.

Suggested Citation

  • Billi, Roberto M., 2018. "Price level targeting and risk management," Economic Modelling, Elsevier, vol. 73(C), pages 163-173.
  • Handle: RePEc:eee:ecmode:v:73:y:2018:i:c:p:163-173
    DOI: 10.1016/j.econmod.2018.03.013
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    Cited by:

    1. Carl E. Walsh, 2011. "The Future of Inflation Targeting," The Economic Record, The Economic Society of Australia, vol. 87(s1), pages 23-36, September.
    2. Giannoni, Marc P., 2014. "Optimal interest-rate rules and inflation stabilization versus price-level stabilization," Journal of Economic Dynamics and Control, Elsevier, vol. 41(C), pages 110-129.
    3. Boneva, Lena & Harrison, Richard & Waldron, Matt, 2018. "Threshold-based forward guidance," Journal of Economic Dynamics and Control, Elsevier, vol. 90(C), pages 138-155.
    4. 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.
    5. Cole, Stephen J., 2020. "The influence of learning and price-level targeting on central bank forward guidance," Journal of Macroeconomics, Elsevier, vol. 65(C).
    6. Caines, Colin & Winkler, Fabian, 2021. "Asset price beliefs and optimal monetary policy," Journal of Monetary Economics, Elsevier, vol. 123(C), pages 53-67.
    7. Marest, Luc & Thurston, Thom, 2018. "Measuring the value of central bank commitment in the benchmark New Keynesian model," Journal of Macroeconomics, Elsevier, vol. 58(C), pages 249-265.
    8. Colin C. Caines & Fabian Winkler, 2018. "Asset Price Learning and Optimal Monetary Policy," International Finance Discussion Papers 1236, Board of Governors of the Federal Reserve System (U.S.).
    9. Ascari, Guido & Florio, Anna & Gobbi, Alessandro, 2023. "Price level targeting under fiscal dominance," Journal of International Money and Finance, Elsevier, vol. 137(C).
    10. Marc P. Giannoni, 2010. "Optimal Interest-Rate Rules in a Forward-Looking Model, and Inflation Stabilization versus Price-Level Stabilization," NBER Working Papers 15986, National Bureau of Economic Research, Inc.
    11. Sofía Bauducco & Rodrigo Caputo, 2010. "Price Level Targeting and Inflation Targeting: a Review," Working Papers Central Bank of Chile 601, Central Bank of Chile.
    12. Yuting Bai, 2014. "Price level targeting with strategic fiscal policy and the value of fiscal leadership," Working Papers 66983487, Lancaster University Management School, Economics Department.

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    More about this item

    Keywords

    Nominal level targets; Optimal policy; Inertial Taylor rule;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • 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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