Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/81894
Authors: 
Billi, Roberto M.
Year of Publication: 
2013
Series/Report no.: 
Sveriges Riksbank Working Paper Series 270
Abstract: 
I compare nominal GDP level targeting to flexible inflation targeting in a small New Keynesian model subject to the zero lower bound on nominal policy rates. First, I study the performance of optimal discretionary policies. I find that, for a standard calibration, inflation targeting under discretion leaves the economy open to a deflationary trap. Nominal GDP level targeting under discretion, by contrast, provides a firm nominal anchor to the economy. Second, I study simple policy rules and the role of smoothing in the rules. With smoothing, a Taylor-type rule performs as well as a nominal GDP level rule. These result suggest that inflation targeting should not be ditched. Still, it can be improved significantly, by using policy rate smoothing to anchor inflation firmly.
Subjects: 
nominal GDP target
optimal policy
simple rules
zero lower bound
JEL: 
E31
E52
E58
Document Type: 
Working Paper

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