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Monday, May 11, 2015

'A Note on Nominal GDP Targeting and the Zero Lower Bound'

Roberto M. Billi, senior researcher at the Sveriges Riksbank, has a new paper on nominal GDP targeting:

”A Note on Nominal GDP Targeting and the Zero Lower Bound,” Sveriges Riksbank Working Paper Series No. 270, Revised May 2015: Abstract: I compare nominal GDP level targeting to 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. But 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.

    Posted by on Monday, May 11, 2015 at 02:43 PM in Academic Papers, Economics, Monetary Policy | Permalink  Comments (9)


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