Is inflation targeting a strategy past its sell-by date?

Alberto Locarno () and Alessandra Locarno ()
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Alessandra Locarno: Libera Universita' Internazionale degli Studi Sociali "Guido Carli"

No 1316, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: In this paper we compare alternative monetary policy strategies to assess which one is best suited (1) to reduce output and inflation volatility and at the same time (2) minimise the frequency and costs of ZLB episodes. We consider only targeting rules, i.e. rules that minimise the loss function assigned by the Government to the monetary policymaker, who is assumed to set the policy rate under discretion. We run a horse race among eight different strategies. Our analysis confirms the theoretical findings by Svensson (1999) and Vestin (2006) that price-level targeting can guarantee a better performance than inflation targeting in terms of both of the criteria described above. These findings are valid regardless of whether interest-rate variability is included in the loss function or not and are robust to changes in model parameters. Nominal GDP-level targeting also performs well: though it is not uniformly superior to inflation targeting or average inflation targeting, it succeeds in ensuring better outcomes over a large range of model parameters and social preferences.

Keywords: E ective lower bound; infl ation targeting; price-level targeting (search for similar items in EconPapers)
JEL-codes: E31 E37 E52 E58 (search for similar items in EconPapers)
Date: 2021-02
New Economics Papers: this item is included in nep-cba, nep-cwa, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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