Working Paper: NBER ID: w30530
Authors: Olena Kostyshyna; Luba Petersen; Jing Yang
Abstract: We provide a comprehensive assessment of leading monetary policy frameworks away from and at the ELB. Inflation targeting, dual mandate, average inflation targeting under 4- and 10-period horizons, price level targeting, and nominal GDP level targeting are evaluated in a laboratory setting. Contrary to theoretical prediction with full information rational expectations, participants exhibit backward-looking expectations and, consequently, rate-targeting mandates outperform level targeting. More history dependence worsens macroeconomic stability. Inflation expectations are managed better when mandates are framed in terms of inflation rates than price levels. Central bank communication significantly improves the performance of price level targeting.
Keywords: monetary policy; inflation targeting; average inflation targeting; price level targeting; nominal GDP targeting
JEL Codes: C92; E52; E70
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| backward-looking expectations (D84) | rate-targeting mandates outperform level-targeting mandates (E61) |
| inflation targeting regime (E63) | macroeconomic stability (E60) |
| shorter horizon average inflation targeting (E31) | better performance than longer horizon (C41) |
| inflation rates framing (E31) | more accurate and stable economic outcomes (E39) |
| central bank communication (E58) | improved performance for price level targeting (E31) |