Price level targeting with evolving credibility

Seppo Honkapohja, Kaushik Mitra*

*Corresponding author for this work

Research output: Contribution to journalArticleScientificpeer-review

Abstract

Global learning dynamics for price-level targeting (PLT) monetary policy are analyzed and compared to inflation targeting in a nonlinear New Keynesian model. Domain of attraction of target steady state is a new robustness criterion for policy regimes. Robustness of PLT depends on whether a known target path is incorporated into learning. Credibility is measured by accuracy of this forecasting method relative to simple statistical forecasts evolving through reinforcement learning. Initial credibility and target price are key factors influencing performance. Model results are in line with the Swedish experience of price stabilization in1930's.

Original languageEnglish
Pages (from-to)88-103
Number of pages16
JournalJOURNAL OF MONETARY ECONOMICS
Volume116
Early online date13 Sep 2019
DOIs
Publication statusPublished - Dec 2020
MoE publication typeA1 Journal article-refereed

Keywords

  • Adaptive learning
  • Inflation targeting
  • Limited credibility
  • Zero interest rate lower bound

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