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Is Price Level Targeting a Robust Monetary Rule?

Author

Listed:
  • Szabolcs Deak

    (Department of Economics, University of Exeter)

  • Paul Levine

    (School of Economics, University of Surrey)

  • Afrasiab Mirza

    (Department of Economics, University of Birmingham)

  • Joseph Pearlman

    (Department of Economics, 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 performs nearly as well as models with financial frictions 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, 2021. "Is Price Level Targeting a Robust Monetary Rule?," Discussion Papers 2104, University of Exeter, Department of Economics.
  • Handle: RePEc:exe:wpaper:2104
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    References listed on IDEAS

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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:

    • D18 - Microeconomics - - Household Behavior - - - Consumer Protection
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • Z1 - Other Special Topics - - Cultural Economics
    • C9 - Mathematical and Quantitative Methods - - Design of Experiments

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