A NOTE ON NOMINAL GDP TARGETING AND THE ZERO LOWER BOUND

2016 ◽  
Vol 21 (8) ◽  
pp. 2138-2157 ◽  
Author(s):  
Roberto M. Billi
Keyword(s):  
Lower Bound ◽  
Central Bank ◽  
Interest Rates ◽  
Price Level ◽  
Supply And Demand ◽  
New Keynesian ◽  
Zero Lower Bound ◽  
Supply And Demand Shocks ◽  
Keynesian Model ◽  
Nominal Interest Rates

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.

scholarly journals In Search of an Appropriate Lower Bound. The Zero Lower Bound vs. the Positive Lower Bound under Discretion and Commitment

2019 ◽  
Vol 20 (4) ◽  
pp. e1028-e1053
Author(s):  
Piotr Ciżkowicz ◽  
Andrzej Rzońca ◽  
Andrzej Torój
Keyword(s):  
Side Effects ◽  
Lower Bound ◽  
Output Growth ◽  
New Keynesian ◽  
Zero Lower Bound ◽  
Slow Potential ◽  
Keynesian Model ◽  
High Inflation ◽  
Inflation Targets ◽  
Potential Output Growth

Abstract Using a standard New Keynesian model, we show that moderate side effects of zero lower bound (ZLB) policy suffice for positive lower bound (PLB) policy to pay off in terms of welfare, especially when central banks fail to commit. For given side effects of the ZLB, as the shock that makes the ZLB bind becomes larger and more persistent, the dominance of PLB policy over ZLB policy becomes more likely. The findings hold for flexible and rigid economies with both fast and slow potential output growth and low and high inflation targets.

scholarly journals Resolving New Keynesian Anomalies with Wealth in the Utility Function

2019 ◽  
pp. 1-46 ◽  
Author(s):  
Pascal Michaillat ◽  
Emmanuel Saez
Keyword(s):  
Lower Bound ◽  
Utility Function ◽  
Social Status ◽  
Government Spending ◽  
Marginal Utility ◽  
New Keynesian ◽  
Zero Lower Bound ◽  
Forward Guidance ◽  
Keynesian Model ◽  
Low Levels

At the zero lower bound, the New Keynesian model predicts that output and inflation collapse to implausibly low levels, and that government spending and forward guidance have implausibly large effects. To resolve these anomalies, we introduce wealth into the utility function; the justification is that wealth is a marker of social status, and people value status. Since people partly save to accrue social status, the Euler equation is modified. As a result, when the marginal utility of wealth is sufficiently large, the dynamical system representing the zero-lower-bound equilibrium transforms from a saddle to a source—which resolves all the anomalies.

scholarly journals REAL RIGIDITIES AND OPTIMAL STABILIZATION AT THE ZERO LOWER BOUND IN NEW KEYNESIAN ECONOMIES

2017 ◽  
Vol 23 (4) ◽  
pp. 1371-1400 ◽  
Author(s):  
Adiya Belgibayeva ◽  
Michal Horvath
Keyword(s):  
Lower Bound ◽  
Interest Rates ◽  
Optimal Policy ◽  
New Keynesian ◽  
Zero Lower Bound ◽  
Wage Setting ◽  
Optimal Stabilization ◽  
Labor Market Segmentation ◽  
Policy Responses ◽  
New Keynesian Models

The paper revisits the literature on real rigidities in New Keynesian models in the context of an economy at the zero lower bound. It identifies strategic interaction among price- and wage-setting agents in the economy as an important determinant of both optimal policy and economic dynamics in deep recessions. In particular, labor market segmentation is shown to have a significant influence on the length of the forward commitment to keep interest rates at zero, the magnitude of the fiscal policy responses as well as inflation volatility in the economy under optimal policy.

Price Level Stability: Some Issues

2000 ◽  
Vol 174 ◽  
pp. 68-79 ◽  
Author(s):  
Vitor Gaspar ◽  
Frank Smets
Keyword(s):  
Lower Bound ◽  
Interest Rates ◽  
Optimal Policy ◽  
Economic Activity ◽  
Price Level ◽  
Conventional Wisdom ◽  
Nominal Interest Rates ◽  
Limited Degree ◽  
Forward Looking

This article challenges the conventional wisdom that price level targeting necessarily increases the volatility of inflation and economic activity. It shows that the optimal policy under commitment for a society that cares only about the variability of output and inflation involves only a limited degree of base drift. The result crucially depends on the importance of forward-looking behaviour and on the credibility of the commitments. The case for price level targeting is strengthened when the possibility of a binding lower bound on nominal interest rates is considered. This may be increasingly relevant in a low inflation environment. This justifies renewed interest on price level targets in the context of thinking through how to prevent and respond to deflationary risks.

Money and Credit in the New Keynesian Model

2014 ◽  
Vol 65 (3) ◽  
Author(s):  
Sven Offick ◽  
Hans-Werner Wohltmann
Keyword(s):  
Interest Rate ◽  
Central Bank ◽  
Interest Rates ◽  
Banking Sector ◽  
New Keynesian ◽  
Credit Channel ◽  
New Keynesian Model ◽  
Static Approximation ◽  
Keynesian Model ◽  
The Interest Rate

AbstractThis paper integrates a money and credit market into a static approximation of the baseline New Keynesian model based on a money-and-credit-in-the-utility approach, in which real balances and borrowing contribute to the household’s utility. In this framework, the central bank has no direct control over the interest rate on bonds. Instead, the central bank’s instrument variables are the monetary base and the refinancing rate, i. e. the rate at which the central bank provides loans to the banking sector. Our approach gives rise to a credit channel, in which current and expected future interest rates on the bond and loan market directly affect current goods demand. The credit channel amplifies the output effects of isolated monetary disturbances. Taking changes in private (inflation and interest rate) expectations into account, we find that - contrarily to BERNANKE and BLINDER (1988) - the credit channel may also dampen the output effects of monetary disturbances. The expansionary effects of a monetary expansion may be substantially diminished if the monetary disturbance is accompanied by a contractionary credit shock. In a dynamic version of our model, in which expectations are formed endogenously, we find that the credit channel amplifies output responses.

scholarly journals The Macroeconomics of Trend Inflation

2014 ◽  
Vol 52 (3) ◽  
pp. 679-739 ◽  
Author(s):  
Guido Ascari ◽  
Argia M. Sbordone
Keyword(s):  
Monetary Policy ◽  
Lower Bound ◽  
New Keynesian ◽  
Inflation Expectations ◽  
Positive Trend ◽  
Zero Lower Bound ◽  
Keynesian Model ◽  
Long Run ◽  
Trend Inflation ◽  
Inflation Targets

Most macroeconomic models for monetary policy analysis are approximated around a zero inflation steady state, but most central banks target an inflation rate of about 2 percent. Many economists have recently proposed even higher inflation targets to reduce the incidence of the zero lower bound constraint on monetary policy. In this survey, we show that the conduct of monetary policy should be analyzed by appropriately accounting for the positive trend inflation targeted by policymakers. We first review empirical research on the evolution and dynamics of U.S. trend inflation and some proposed new measures to assess the volatility and persistence of trend-based inflation gaps. We then construct a Generalized New Keynesian model that accounts for a positive trend inflation. In this model, an increase in trend inflation is associated with a more volatile and unstable economy and tends to destabilize inflation expectations. This analysis offers a note of caution regarding recent proposals to address the existing zero lower bound problem by raising the long-run inflation target. (JEL E12, E31, E32, E52, E58)

scholarly journals Oil, Equities, and the Zero Lower Bound

2021 ◽  
Vol 13 (2) ◽  
pp. 214-253
Author(s):  
Deepa D. Datta ◽  
Benjamin K. Johannsen ◽  
Hannah Kwon ◽  
Robert J. Vigfusson
Keyword(s):  
Lower Bound ◽  
Interest Rates ◽  
Empirical Evidence ◽  
Equity Returns ◽  
Economic Environment ◽  
Zero Lower Bound ◽  
Macroeconomic News ◽  
Nominal Interest Rates ◽  
Theoretical Predictions

From late 2008 to 2014, oil and equity returns were more positively correlated than in other periods. In addition, we show that both oil and equity returns became more responsive to macroeconomic news. We provide empirical evidence that these changes resulted from the zero lower bound (ZLB) on nominal interest rates, consistent with the theoretical predictions of a model that includes the ZLB. Although the ZLB alters the economic environment in theory, supportive empirical evidence has been lacking. Our paper provides clear evidence of the ZLB altering the economic environment. (JEL E12, E32, E43, G12, G14, Q43)

Sign in / Sign up

Export Citation Format

Share Document