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Title: Targeting Nominal GDP or Prices: Guidance and Expectation Dynamics

Author(s): Seppo Honkapohja and Kaushik Mitra

Publication Date: March 2014

Keyword(s): Adaptive Learning, Inflation Targeting, Monetary Policy and Zero Interest Rate Lower Bound

Programme Area(s): International Macroeconomics

Abstract: We examine global dynamics under infinite-horizon learning in New Keynesian models where monetary policy practices either price-level or nominal GDP targeting and compare these regimes to inflation targeting. These interest-rate rules are subject to the zero lower bound. Robustness of the three rules in learning adjustment are compared using criteria for the domain of attraction of the targeted steady state, volatility of inflation and output and sensitivity to the speed of learning parameter. Performance of price-level and nominal GDP targeting significantly improves if the additional guidance in these regimes is incorporated in private agents' learning.

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Bibliographic Reference

Honkapohja, S and Mitra, K. 2014. 'Targeting Nominal GDP or Prices: Guidance and Expectation Dynamics'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=9857