A new twist on an old framework: bounded price-level targeting

David Altig ()
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David Altig: Federal Reserve Bank of Cleveland

Business Economics, 2018, vol. 53, issue 3, No 7, 156-162

Abstract: Abstract One of the notable macroeconomic developments of the last two decades has been the apparent decline in the so-called neutral real rate of interest (or r-star). The declining level of r-star has significantly reduced forecasts of the steady-state federal funds rate associated with “normalized” monetary policy. Because a lower steady-state policy rate implies a heightened probability of reaching the effective lower bound on the federal funds rate in the event of an economic downturn, a debate has opened among academics and policymakers about potential changes in Fed’s monetary policy framework that might ameliorate the lower bound problem. This paper introduces a variation of price-level targeting that satisfies a definition of price stability that requires the central bank to keep the price level within a pre-specified percentage of a pre-specified target path for all time horizons into the future. The framework, referred to as bounded price-level targeting, is compared to other proposed frameworks. The paper discusses the conditions under which bounded price-level targeting is consistent with other proposals.

Keywords: Monetary policy framework; Price stability; Price-level targeting; Bounded nominal uncertainty (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1057/s11369-018-0085-1

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