Determinacy and E-stability with interest rate rules at the zero lower bound

Yunjong Eo and Nigel McClung

No 14/2021, Bank of Finland Research Discussion Papers from Bank of Finland

Abstract: We evaluate and compare alternative monetary policy rules, namely average inflation targeting, price level targeting, and traditional inflation targeting rules, in a standard New Keynesian model that features recurring, transient zero lower bound regimes. We use determinacy and expectational stability (E-stability) of equilibrium as the criteria for stabilization policy. We find that price level targeting policy, including nominal income targeting as a special case, most effectively promotes determinacy and E-stability among the policy frameworks, whereas standard inflation targeting rules are prone to indeterminacy. Average inflation targeting can induce determinacy and E-stability effectively, provided the averaging window is sufficiently long.

Keywords: Zero Lower Bound; Markov-Switching; Expectations; Price level targeting; Average inflation targeting; Nominal income targeting (search for similar items in EconPapers)
JEL-codes: E31 E47 E52 E58 (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-dge and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bofrdp:rdp2021_014

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