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Is Price Level Targeting a Robust Monetary Rule?

Author

Listed:
  • Szabolcs Deak

    (University of Exeter)

  • Paul Levine

    (University of Surrey)

  • Afrasiab Mirza

    (University of Birmingham)

  • Joseph Pearlman

    (City University London)

Abstract

We study the design of monetary policy rules robust to model uncertainty across a set of well-established DSGE models with varied financial frictions. In our novel forward-looking approach, policymakers weight models based on relative forecasting performance. We find that models with frictions between households and banks forecast best during periods of financial turmoil while those with frictions between banks and firms perform best during tranquil periods. However, a model without financial frictions outperforms all models on average. The optimal robust policy is close to a price-level rule which is key when facing uncertainty over the nature of financial frictions.

Suggested Citation

  • Szabolcs Deak & Paul Levine & Afrasiab Mirza & Joseph Pearlman, 2020. "Is Price Level Targeting a Robust Monetary Rule?," Discussion Papers 20-27, Department of Economics, University of Birmingham.
  • Handle: RePEc:bir:birmec:20-27
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    More about this item

    Keywords

    Bayesian estimation; DSGE models; Financial frictions; Forecasting; Prediction Pools; Optimal Simple Rules.;
    All these keywords.

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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