On Targeting Frameworks and Optimal Monetary Policy

Martin Bodenstein and Junzhu Zhao

No 2017-098, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Speed limit policy, a monetary policy strategy that focuses on stabilizing inflation and the change in the output gap, consistently delivers better welfare outcomes than flexible inflation targeting or flexible price level targeting in empirical New Keynesian models when policymakers lack the ability to commit to future policies. Even if the policymaker can commit under an inflation targeting strategy, the discretionary speed limit policy performs better for most empirically plausible model parameterizations from a normative perspective.

Keywords: Delegation; Inflation targeting; Optimal monetary policy; Price level targeting; Speed limit policy (search for similar items in EconPapers)
JEL-codes: E52 E58 (search for similar items in EconPapers)
Pages: 86 pages
Date: 2017-09-22
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2017-98

DOI: 10.17016/FEDS.2017.098

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