Is inflation targeting a strategy past its sell-by date?

In this paper we compare alternative monetary policy strategies to assess which one is best suited (1) to reduce output and inflation volatility and at the same time (2) minimise the frequency and costs of ZLB episodes. We consider only targeting rules, i.e. rules that minimise the loss function assigned by the Government to the monetary policymaker, who is assumed to set the policy rate under discretion. We run a horse race among eight different strategies. Our analysis confirms the theoretical findings by Svensson (1999) and Vestin (2006) that price-level targeting can guarantee a better performance than inflation targeting in terms of both of the criteria described above. These findings are valid regardless of whether interest-rate variability is included in the loss function or not and are robust to changes in model parameters. Nominal GDP-level targeting also performs well: though it is not uniformly superior to inflation targeting or average inflation targeting, it succeeds in ensuring better outcomes over a large range of model parameters and social preferences.