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Price Level Targeting and Risk Management

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  • Billi, Roberto

    () (Research Department, Central Bank of Sweden)

Abstract

Many argue that, because the economic outlook is inherently uncertain, central banks should apply a risk management approach to monetary policy, by promising a gradual liftoff of the policy interest rate from its lower bound. Using a small New Keynesian model with the central bank operating under optimal discretion, I compare the effects of uncertainty on economic performance, respectively under strict price level targeting and nominal gross domestic product (GDP) level targeting. As the results clarify, even though uncertainty hampers the effectiveness of monetary policy, the extent to which a central bank should delay liftoff depends crucially on its policy framework.

Suggested Citation

  • Billi, Roberto, 2015. "Price Level Targeting and Risk Management," Working Paper Series 302, Sveriges Riksbank (Central Bank of Sweden), revised 01 Feb 2016.
  • Handle: RePEc:hhs:rbnkwp:0302
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    References listed on IDEAS

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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. 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.
    6. Colin 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.).
    7. 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.
    8. Sofía Bauducco & Rodrigo Caputo, 2010. "Price Level Targeting and Inflation Targeting: a Review," Working Papers Central Bank of Chile 601, Central Bank of Chile.
    9. 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.

    More about this item

    Keywords

    nominal level targets; optimal policy; inertial Taylor rule;

    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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