On Targeting Frameworks and Optimal Monetary Policy

Speed limit policy, a monetary policy strategy that focuses on stabilizing inflation and the change in the output gap, consistently delivers better welfare outcomes than flexible inflation targeting or flexible price level targeting in empirical New Keynesian models when policymakers lack the abilit...

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Bibliographic Details
Published in:Finance and economics discussion series 2017-09, Vol.2017 (98)
Main Authors: Bodenstein, Martin, Zhao, Junzhu
Format: Article
Language:English
Online Access:Get full text
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Summary:Speed limit policy, a monetary policy strategy that focuses on stabilizing inflation and the change in the output gap, consistently delivers better welfare outcomes than flexible inflation targeting or flexible price level targeting in empirical New Keynesian models when policymakers lack the ability to commit to future policies. Even if the policymaker can commit under an inflation targeting strategy, the discretionary speed limit policy performs better for most empirically plausible model parameterizations from a normative perspective.
ISSN:1936-2854
DOI:10.17016/FEDS.2017.098