Working Paper: CEPR ID: DP10513
Authors: Seppo Honkapohja; Kaushik Mitra
Abstract: We examine global dynamics under learning in New Keynesian models with price level targeting that is subject to the zero lower bound. The role of forward guidance is analyzed under transparency about the policy rule. Properties of transparent and non-transparent regimes are compared to each other and to the corresponding cases of inflation targeting. Robustness properties for different regimes are examined in terms of the domain of attraction of the targeted steady state and volatility of inflation, output and interest rate. We analyze the effect of higher inflation targets and large expectational shocks for the performance of these policy regimes.
Keywords: Adaptive Learning; Monetary Policy; Zero Interest Rate Lower Bound
JEL Codes: E52; E58; E63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Price level targeting (E31) | Better performance than inflation targeting (E61) |
| Forward guidance (Y20) | Better performance of price level targeting (E31) |
| Higher inflation targets (E31) | Performance of policy regimes (E65) |
| Large expectational shocks (D84) | Preference for price level targeting (E31) |
| Transparency of policy rule (G38) | Impact on dynamics of economic model (E19) |
| Expectational shocks (small) (D84) | Better performance of inflation targeting (E61) |
| Forward guidance (Y20) | Enhances robustness of price level targeting (E31) |