DP10513 Comparing Inflation and Price Level Targeting: the Role of Forward Guidance and Transparency

Author(s): Seppo Honkapohja, Kaushik Mitra
Publication Date: March 2015
Keyword(s): Adaptive learning, monetary policy, zero interest rate lower bound
JEL(s): E52, E58, E63
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10513

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.