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Price level targeting under fiscal dominance

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  • Ascari, Guido
  • Florio, Anna
  • Gobbi, Alessandro

Abstract

The adoption of a “makeup” strategy has been one of the proposals in the review of the Fed’s monetary policy framework. Another suggestion, to avoid the zero lower bound, has been a more active role for fiscal policy. We put together these ideas to study price level targeting under a fiscally-led regime. We find that following a deflationary demand shock: (i) the central bank should increase (rather than decrease) the policy rate; (ii) the central bank, thus, avoids the zero lower bound; (iii) price level targeting is welfare improving with respect to inflation targeting, unless one considers a nonstandard inflation targeting rule with a negative inflation coefficient and a high degree of smoothing.

Suggested Citation

  • Ascari, Guido & Florio, Anna & Gobbi, Alessandro, 2023. "Price level targeting under fiscal dominance," Journal of International Money and Finance, Elsevier, vol. 137(C).
    • Handle: RePEc:eee:jimfin:v:137:y:2023:i:c:s0261560623000773
    DOI: 10.1016/j.jimonfin.2023.102876
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    Cited by:

    1. Chen, Haixia & Le, Vo Phuong Mai & Meenagh, David & Minford, Patrick, 2023. "UK Monetary Policy in An Estimated DSGE Model with State-Dependent Price and Wage Contracts," Cardiff Economics Working Papers E2023/22, Cardiff University, Cardiff Business School, Economics Section.

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    More about this item

    Keywords

    Price level targeting; Monetary and fiscal policy interactions;

    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
    • 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

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