Price level targeting and stabilization policy

Aleksander Berentsen () and Christopher Waller ()

No 2009-033, Working Papers from Federal Reserve Bank of St. Louis

Abstract: We construct a dynamic stochastic general equilibrium model to study optimal monetary stabilization policy. Prices are fully flexible and money is essential for trade. Our main result is that if the central bank pursues a price-level target, it can control inflation expectations and improve welfare by stabilizing short-run shocks to the economy. The optimal policy involves smoothing nominal interest rates which effectively smooths consumption across states.

Keywords: Monetary policy; Econometric models (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon and nep-pke
Date: 2009
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