Monetary-fiscal interactions under price level targeting

Guido Ascari, Anna Florio and Alessandro Gobbi

Papers from arXiv.org

Abstract: The adoption of a "makeup" strategy is one of the proposals in the ongoing review of the Fed's monetary policy framework. Another suggestion, to avoid the zero lower bound, is a more active role for fiscal policy. We put together these ideas to study monetary-fiscal interactions under price level targeting. Under price level targeting and a fiscally-led regime, we find that following a deflationary demand shock: (i) the central bank increases (rather than decreases) the policy rate; (ii) the central bank, thus, avoids the zero lower bound; (iii) price level targeting is generally welfare improving if compared to inflation targeting.

Date: 2020-10
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2010.14979

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