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Price‐Level Targeting and Stabilization Policy
Author(s) -
BERENTSEN ALEKSANDER,
WALLER CHRISTOPHER
Publication year - 2011
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/j.1538-4616.2011.00452.x
Subject(s) - economics , monetary policy , monetary economics , inflation (cosmology) , consumption smoothing , consumption (sociology) , stabilization policy , nominal interest rate , welfare , inflation targeting , dynamic stochastic general equilibrium , price level , interest rate , general equilibrium theory , new keynesian economics , smoothing , construct (python library) , control (management) , macroeconomics , real interest rate , business cycle , computer science , market economy , management , computer vision , social science , physics , sociology , theoretical physics , programming language
We construct a dynamic stochastic general equilibrium model to study optimal monetary stabilization policy. Prices are fully flexible and money is essential for trade. Our main result is that if the central bank pursues a price‐level target, it can control inflation expectations and improve welfare by stabilizing short‐run shocks to the economy. The optimal policy involves smoothing nominal interest rates that effectively smooths consumption across states.