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Comparing Inflation and Price‐Level Targeting: The Role of Forward Guidance and Transparency
Author(s) -
Honkapohja Seppo,
Mitra Kaushik
Publication year - 2015
Publication title -
the manchester school
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.361
H-Index - 42
eISSN - 1467-9957
pISSN - 1463-6786
DOI - 10.1111/manc.12113
Subject(s) - economics , transparency (behavior) , inflation targeting , monetary policy , robustness (evolution) , volatility (finance) , econometrics , monetary economics , inflation (cosmology) , physics , computer science , chemistry , biochemistry , computer security , gene , theoretical physics
We examine global dynamics under learning in N ew K eynesian models with price‐level targeting that is subject to the zero lower bound. The role of forward guidance is analyzed under transparency about the policy rule. Properties of transparent and nontransparent regimes are compared with each other and to the corresponding cases of inflation targeting. Robustness properties for different regimes are examined in terms of the domain of attraction of the targeted steady state and volatility of inflation, output and interest rate. We analyze the effect of higher inflation targets and large expectational shocks for the performance of these policy regimes.