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Price level targeting and risk management

Roberto Billi

Economic Modelling, 2018, vol. 73, issue C, 163-173

Abstract: The desirability of a nominal-level target during zero lower bound (ZLB) episodes has become a relevant topic for central bankers and academics. In such a context, this article studies the effects of uncertainty about the future state of the economy on the performance of strict-price-level targeting versus nominal-GDP-level targeting. These targeting frameworks are compared in a small New Keynesian model, which offers a clear illustration of the tradeoffs faced by the central bank. The analysis shows that uncertainty about the future hampers economic performance to a greater extent under nominal-GDP-level targeting, relative to strict-price-level targeting. The reason is that strict-price-level targeting induces greater policy inertia and, therefore, improves the tradeoffs faced by the central bank during ZLB episodes.

Keywords: Nominal level targets; Optimal policy; Inertial Taylor rule (search for similar items in EconPapers)
JEL-codes: E31 E52 E58 (search for similar items in EconPapers)
Date: 2018
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Working Paper: Price Level Targeting and Risk Management (2016) Downloads
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DOI: 10.1016/j.econmod.2018.03.013

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