Is Price Level Targeting a Robust Monetary Rule?
Szabolcs Deak (),
Paul Levine (),
Afrasiab Mirza and
Joseph Pearlman ()
Discussion Papers from Department of Economics, University of Birmingham
We study the design of monetary policy rules robust to model uncertainty across a set of well-established DSGE models with varied financial frictions. In our novel forward-looking approach, policymakers weight models based on relative forecasting performance. We find that models with frictions between households and banks forecast best during periods of financial turmoil while those with frictions between banks and firms perform best during tranquil periods. However, a model without financial frictions outperforms all models on average. The optimal robust policy is close to a price-level rule which is key when facing uncertainty over the nature of financial frictions.
Keywords: Bayesian estimation; DSGE models; Financial frictions; Forecasting; Prediction Pools; Optimal Simple Rules. (search for similar items in EconPapers)
JEL-codes: D52 D53 E44 G18 G23 (search for similar items in EconPapers)
Pages: 73 pages
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon and nep-ore
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Working Paper: Is Price Level Targeting a Robust Monetary Rule? (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:bir:birmec:20-27
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