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Price Level Targeting and Risk Management

Roberto Billi

No 302, Working Paper Series from Sveriges Riksbank (Central Bank of Sweden)

Abstract: Many argue that, because the economic outlook is inherently uncertain, central banks should apply a risk management approach to monetary policy, by promising a gradual liftoff of the policy interest rate from its lower bound. Using a small New Keynesian model with the central bank operating under optimal discretion, I compare the effects of uncertainty on economic performance, respectively under strict price level targeting and nominal gross domestic product (GDP) level targeting. As the results clarify, even though uncertainty hampers the effectiveness of monetary policy, the extent to which a central bank should delay liftoff depends crucially on its policy framework.

Keywords: nominal level targets; optimal policy; inertial Taylor rule (search for similar items in EconPapers)
JEL-codes: E31 E52 E58 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2015-06-01, Revised 2016-02-01
New Economics Papers: this item is included in nep-mac, nep-mon and nep-rmg
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