 Learning and misperception of makeup strategiesMartin Bodenstein, James Hebden and Fabian Winkler Journal of Economic Dynamics and Control, 2022, vol. 139, issue C Abstract: Leading central banks have recently explored monetary policy strategies that offset past deviations of inflation from its target as an effective way to provide economic stimulus when monetary policy is constrained by the zero lower bound. Yet, the effectiveness of such makeup strategies depends on the central bank’s ability to influence agents’ expectations. We develop a model of learning about a central bank’s reaction function from observed interest rates that takes into account the limited informational content at the zero lower bound. We apply this model to study the effectiveness of switching from inflation targeting to price-level targeting. When agents learn, switching to price-level targeting at the onset of a recession does not yield the desired stabilization benefits. These benefits materialize only after the economy has been away from the zero lower bound for a sufficiently long time. We also find that temporary price-level targeting is likely to be much less effective than its permanent counterpart. Keywords: Imperfect information; Learning; Price-Level targeting; Makeup strategies; Zero lower bound; Framework review (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:139:y:2022:i:c:s0165188922001233 DOI: 10.1016/j.jedc.2022.104417 Access Statistics for this article Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok More articles in Journal of Economic Dynamics and Control from Elsevier |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to .
EconPapers is hosted by the
School of Business at Örebro University.