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Revisiting monetary policy objectives and strategies: international experience and challenges from the ELB

Martina Cecioni (), Adriana Grasso, Alessandro Notarpietro () and Massimiliano Pisani ()

No 660, Questioni di Economia e Finanza (Occasional Papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: We review the experience of central banks in 12 advanced economies in formulating their price stability objectives during the last 20 years. All central banks under review target a small and positive inflation rate (typically 2%). In most cases, they set a point target, in some a range or a point with bands around it. Range and bands are more common among small open economies. We also conduct a model-based analysis of the macroeconomic performance of different monetary policy strategies when the policy rate is constrained by the effective lower bound (ELB). Under standard inflation targeting, inflation remains, on average, below target (disinflationary bias). ELB incidence and duration are higher the lower the target. A point inflation target performs better than a range, especially if compared to an asymmetric one with the focal point close to the ceiling. Makeup strategies (price level targeting and average inflation targeting) and asymmetric inflation targeting strategies, in which the central bank’s reaction to below-target inflation is stronger compared with the case of above-target inflation, reduce the disinflationary effects of the ELB and have better macroeconomic stabilization properties compared with standard inflation targeting.

Keywords: central banking; monetary policy rules; effective lower bound (search for similar items in EconPapers)
JEL-codes: E31 E32 E52 E58 (search for similar items in EconPapers)
Date: 2021-12
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac and nep-mon
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