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Title: Comparing Inflation and Price Level Targeting: the Role of Forward Guidance and Transparency

Author(s): Seppo Honkapohja and Kaushik Mitra

Publication Date: March 2015

Keyword(s): Adaptive learning, monetary policy and zero interest rate lower bound

Programme Area(s): International Macroeconomics

Abstract: We examine global dynamics under learning in New Keynesian 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 non-transparent regimes are compared to 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.

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Bibliographic Reference

Honkapohja, S and Mitra, K. 2015. 'Comparing Inflation and Price Level Targeting: the Role of Forward Guidance and Transparency'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=10513