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.

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.

New Chicago Views on Inflation Control: The Neo-Fisherian Approach and the Fiscal Theory of the Price Level

2019 ◽  
Vol 52 (1) ◽  
pp. 69-87
Author(s):  
Peter Spahn
Keyword(s):  
Monetary Policy ◽  
Lower Bound ◽  
Interest Rates ◽  
Real Interest Rate ◽  
Price Level ◽  
Central Banks ◽  
Jel Classification ◽  
Inflation Target ◽  
Long Run ◽  
Nominal Interest Rates

Abstract Whereas in former times, the ‘Chicago View’ in monetary policy stood for the Quantity Theory and money supply control, it is now the centre of unconventional approaches in macro theory. The Neo-Fisherian proposal suggests, in the case of low inflation and nominal interest rates pegged to the zero-lower bound, to increase policy rates immediately to the long-run equilibrium value that corresponds to the ‘natural’ real interest rate and the inflation target. The Fiscal Theory of the Price Level believes that goods prices jump to a level that validates the long-run sustainability condition of government debt even if central banks abstain from monetising. Both views are criticized for analytical and empirical reasons. Zusammenfassung Während in früheren Zeiten die ‘Chicago-Sicht’ in der Geldpolitik für die Quantitätstheorie und das Konzept der Geldmengensteuerung stand, werden heute damit unkonventionelle Positionen in der makroökonomischen Theorie assoziiert. Der neue Fisher-Ansatz empfiehlt, im Fall niedriger Inflation und einer Beschränkung durch die Null-Zins-Grenze die Zentralbankzinsen direkt auf das Niveau anzuheben, dass durch den ‘natürlichen’ Realzins und die Zielinflationsrate bestimmt ist. Die Fiskalische Theorie der Preise behauptet, dass das Güterpreisniveau auf einen Wert springt, der die langfristige reale Tragfähigkeit der Staatsschulden sichert, selbst wenn die Notenbank keine Monetisierung betreibt. Beide Positionen können empirisch nicht überzeugen und werden einer analytischen Kritik unterzogen. JEL Classification: E52, E58

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.

scholarly journals Why The Quantity Of Money Still Matters

2011 ◽  
Vol 3 (2) ◽  
Author(s):  
Michael Cosgrove ◽  
Daniel Marsh
Keyword(s):  
Interest Rates ◽  
Federal Reserve ◽  
Price Level ◽  
Theory Model ◽  
Conventional Wisdom ◽  
Real Output ◽  
Font Size ◽  
Short Term ◽  
Federal Funds ◽  
Federal Funds Rate

<p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt;"><span style="font-size: 10pt;"><span style="font-family: Times New Roman;">The operating procedure of Federal Reserve policy focuses almost exclusively on interest rates, in particular short term rates such as the federal funds rate. Conventional wisdom today interprets a low federal funds rate as an indicator of an expansionary monetary policy, and a high federal funds rate as indicative of a contractionary policy.</span></span></p><p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt;"><span style="font-size: 10pt;"><span style="font-family: Times New Roman;">&nbsp;</span></span></p><p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt;"><span style="font-size: 10pt;"><span style="font-family: Times New Roman;">Our thesis is that this conventional wisdom is flawed. We develop a quantity theory model to illustrate how changes in the real money supply can impact both the price level and real output. We present data showing that when the Fed slows the rate of growth of the monetary base to approximately the growth rate of GDP, that this slowdown also impacts real variables. However, according to comments, the Federal Reserve pays little attention to the quantity of money.</span></span></p><p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt;"><span style="font-size: 10pt;"><span style="font-family: Times New Roman;">&nbsp;</span></span></p><p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt;"><span style="font-size: 10pt;"><span style="font-family: Times New Roman;">Finally we asked: Since the Federal Reserve pays little attention to the quantity of money, what variables does the FOMC likely consider in deciding to alter the federal funds rate? The answer, perhaps not surprisingly, appears to be variables readily measured and easily related to by the general public &ndash; prices and capacity.</span></span></p>

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)

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