A NOTE ON NOMINAL GDP TARGETING AND THE ZERO LOWER BOUND

Roberto M. Billi

33 citations0/0 files storedMacroeconomic Dynamics

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Monetary Policy and Economic Impact Economic Theory and Policy Economic theories and models

Abstract

I compare nominal gross domestic product (GDP) level targeting with strict price level targeting in a small New Keynesian model, with the central bank operating under optimal discretion and facing a zero lower bound on nominal interest rates. I show that, if the economy is only buffeted by purely temporary shocks to inflation, nominal GDP level targeting may be preferable because it requires the burden of the shocks to be shared by prices and output. However, in the presence of persistent supply and demand shocks, strict price level targeting may be superior because it induces greater policy inertia and improves the tradeoffs faced by the central bank. During lower bound episodes, somewhat paradoxically, nominal GDP level targeting leads to larger falls in nominal GDP.

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References

2003Zero Bound on Interest Rates and Optimal Monetary Policy 2003The Zero Bound on Interest Rates and Optimal Monetary Policy 1988Robustness properties of a rule for monetary policy 2012The Optimal Inflation Rate in New Keynesian Models: Should Central Banks Raise Their Inflation Targets in Light of the Zero Lower Bound?2003Escaping from a Liquidity Trap and Deflation: The Foolproof Way and Others 2006Optimal Monetary Policy under Commitment with a Zero Bound on Nominal Interest Rates 2006Discretionary monetary policy and the zero lower bound on nominal interest rates 1999Price-Level Targeting versus Inflation Targeting: A Free Lunch?

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