The Perils of Nominal Targets

Roc Armenter
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Roc Armenter: Federal Reserve Bank of Philadelphia

No 428, 2014 Meeting Papers from Society for Economic Dynamics

Abstract: A monetary authority can be committed to pursuing an inflation, price-level, or nominal output target yet systematically fail to achieve the specified goal. Constrained by the zero lower bound on the policy rate, the monetary authority is unable to implement its objectives when private-sector expectations stray from the target in the first place. Low-inflation expectations become self-fullling, resulting in an additional Markov equilibrium in which both nominal and real variables are typically below target. Introducing a stabilization goal for long-term nominal rates anchors private-sector expectations on a unique Markov equilibrium without fully compromising the policy responses to shocks.

Date: 2014
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (14)

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