The Role of Money in Monetary Policy at the Lower Bound

Söderström, Ulf, Roberto Billi and Carl Walsh
Authors registered in the RePEc Author Service: Ulf Söderström ()

No 14865, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: In light of the current low-interest-rate environment, we reconsider the merit of a money growth target (MGT) relative to a conventional inflation targeting (IT) regime, and to the notion of price level targeting (PLT). Through the lens of a New Keynesian model, and accounting for a zero lower bound (ZLB) constraint on the nominal interest rate, we show, not surprisingly, that PLT performs best in terms of social welfare. However, the ranking between IT and MGT is not a foregone conclusion. In particular, although MGT makes monetary policy vulnerable to money demand shocks, it contributes to achieving price level stability and reduces the incidence and severity of the ZLB relative to both IT and PLT. We also show that MGT lessens the need for the fiscal authority to engage alongside the central bank in fighting recessions. To illustrate this fiscal benefit of MGT, we introduce a simple rule for the fiscal authority to raise government purchases when GDP falls below potential. If the government fails to make up for a substantial share of the shortfalls in GDP, then IT performs worse than MGT from the perspective of society.

Keywords: Friedman's k-percent rule; Zlb constraint; Fiscal policy; Automatic stabilizers (search for similar items in EconPapers)
JEL-codes: E31 E42 E52 (search for similar items in EconPapers)
Date: 2020-06
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://cepr.org/publications/DP14865 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Journal Article: The Role of Money in Monetary Policy at the Lower Bound (2023)
Working Paper: The Role of Money in Monetary Policy at the Lower Bound (2020)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:14865

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP14865

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().