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Targeting nominal GDP or prices:: Guidance and expectation dynamics

Kaushik Mitra and Seppo Honkapohja ()

No 4/2014, Research Discussion Papers from Bank of Finland

Abstract: We examine global dynamics under infinite-horizon learning in New Keynesian models where monetary policy practices either price level or nominal GDP targeting and compare these regimes to inflation targeting. These interest-rate rules are subject to the zero lower bound. Robustness of the three rules in learning adjustment are compared using criteria for the domain of attraction of the targeted steady state, volatility of inflation and output and sensitivity to the speed of learning parameter. Performance of price-level and nominal GDP targeting significantly improves if the additional guidance in these regimes is incorporated in private agents' learning. JEL Classification: E63, E52, E58. Keywords: Adaptive Learning, Monetary Policy, Inflation Targeting, Zero Interest Rate Lower Bound

JEL-codes: E63 E52 E58 (search for similar items in EconPapers)
Date: 2014-01-15
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