Research Discussion Papers, Bank of Finland
No 4/2014:
Targeting nominal GDP or prices: Guidance and expectation dynamics
Kaushik Mitra and Seppo Honkapohja ()
Abstract: We examine global dynamics under infinite-horizon learning
in New Keynesian models where monetary policy practices either pricelevel
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; monetary policy; inflation targeting; zero interest rate lower bound; (follow links to similar papers)
JEL-Codes: E52; E58; E63; (follow links to similar papers)
47 pages, January 15, 2014
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