On Targeting Frameworks And Optimal Monetary Policy

Martin Bodenstein and Junzhu Zhao

Journal of Money, Credit and Banking, 2019, vol. 51, issue 8, 2077-2113

Abstract: We show that speed limit policy, a monetary policy strategy that focuses on stabilizing inflation and the change in the output gap, consistently outperforms flexible inflation targeting and flexible price level targeting in empirical medium‐scale DSGE models under discretionary policymaking. In contrast to small‐scale New Keynesian models, this welfare ranking of the targeting frameworks is not overturned when inflation dynamics are mostly backward‐looking. Importantly, the performance of the speed limit policy shows less sensitivity to its parameterization than other frameworks that target the inflation rate or the price level.

Date: 2019
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https://doi.org/10.1111/jmcb.12633

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Working Paper: On Targeting Frameworks and Optimal Monetary Policy (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:51:y:2019:i:8:p:2077-2113

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