Price level targeting under fiscal dominance

Guido Ascari, Anna Florio and Alessandro Gobbi

Journal of International Money and Finance, 2023, vol. 137, issue C

Abstract: The adoption of a “makeup” strategy has been one of the proposals in the review of the Fed’s monetary policy framework. Another suggestion, to avoid the zero lower bound, has been a more active role for fiscal policy. We put together these ideas to study price level targeting under a fiscally-led regime. We find that following a deflationary demand shock: (i) the central bank should increase (rather than decrease) the policy rate; (ii) the central bank, thus, avoids the zero lower bound; (iii) price level targeting is welfare improving with respect to inflation targeting, unless one considers a nonstandard inflation targeting rule with a negative inflation coefficient and a high degree of smoothing.

Keywords: Price level targeting; Monetary and fiscal policy interactions (search for similar items in EconPapers)
JEL-codes: E31 E52 E63 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:137:y:2023:i:c:s0261560623000773

DOI: 10.1016/j.jimonfin.2023.102876

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