Working Paper: CEPR ID: DP9857
Authors: Seppo Honkapohja; Kaushik Mitra
Abstract: We examine global dynamics under infinite-horizon learning in New Keynesian models where monetary policy practices either price-level or nominal GDP targeting and compare these regimes to inflation targeting. These interest-rate rules are subject to the zero lower bound. Robustness of the three rules in learning adjustment are compared using criteria for the domain of attraction of the targeted steady state, volatility of inflation and output and sensitivity to the speed of learning parameter. Performance of price-level and nominal GDP targeting significantly improves if the additional guidance in these regimes is incorporated in private agents' learning.
Keywords: Adaptive learning; Inflation targeting; 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 |
|---|---|
| Incorporation of guidance (Y20) | Improved performance of targeting regimes (E61) |
| Absence of guidance (D52) | Less favorable outcomes for targeting regimes (P27) |
| Learning process (C45) | Stability of the economic system under PLT and NGDP (E12) |
| Learning approach (C91) | Effectiveness of monetary policy frameworks (E52) |