Forward Guidance at the Zero Lower Bound in a Model of Price-Level Targeting
Gerhard Illing and
Thomas Siemsen
Discussion Papers in Economics from University of Munich, Department of Economics
Abstract:
We study monetary policy at the ZLB in a traceable three-period model, in which price-level targeting emerges endogenously in the welfare function. We characterize optimal price-level forward guidance under discretion and commitment. Potentially non-monotonic discretionary welfare losses are lowest with perfectly flexible prices. Price-level targeting introduces a new constraint on optimal forward guidance that restricts the credible amount of overshooting. With this constraint, the zero lower bound may be binding even after the shock has abated. We characterize conditions when the commitment to hold nominal rates at zero for an extended period is optimal. Finally, we introduce government spending and show that under persistently low policy rates optimal government spending becomes more front-loaded, while procyclical austerity fares worse than discretionary government spending.
Keywords: zero lower bound; forward guidance; price-level target; optimal policy (search for similar items in EconPapers)
JEL-codes: E43 E52 E58 (search for similar items in EconPapers)
Date: 2015-02-09
New Economics Papers: this item is included in nep-mac and nep-mon
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Citations: View citations in EconPapers (1)
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Related works:
Journal Article: Forward Guidance at the Zero Lower Bound in a Model of Price-Level Targeting (2016) 
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Persistent link: https://EconPapers.repec.org/RePEc:lmu:muenec:22797
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