Research Discussion Papers, Bank of Finland
No 9/2015:
Comparing inflation and price level targeting: the role of forward guidance and transparency
Seppo Honkapohja ()
and 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; inflation targeting; zero interest rate lower bound; (follow links to similar papers)
JEL-Codes: E52; E58; E63; (follow links to similar papers)
44 pages, April 7, 2015
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