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Price Level Targeting and Risk Management

Author

Listed:
  • 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
    as

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    File URL: http://www.riksbank.se/Documents/Rapporter/Working_papers/2015/rap_wp302_160224_revised.pdf
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    References listed on IDEAS

    as
    1. Anton Nakov, 2008. "Optimal and Simple Monetary Policy Rules with Zero Floor on the Nominal Interest Rate," International Journal of Central Banking, International Journal of Central Banking, vol. 4(2), pages 73-127, June.
    2. Adam, Klaus & Billi, Roberto M., 2007. "Discretionary monetary policy and the zero lower bound on nominal interest rates," Journal of Monetary Economics, Elsevier, vol. 54(3), pages 728-752, April.
    Full references (including those not matched with items on IDEAS)

    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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