DP9857 Targeting Nominal GDP or Prices: Guidance and Expectation Dynamics
|Author(s):||Seppo Honkapohja, Kaushik Mitra|
|Publication Date:||March 2014|
|Keyword(s):||Adaptive Learning, Inflation Targeting, 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=9857|
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.