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A new twist on an old framework: bounded price-level targeting

A new twist on an old framework: bounded price-level targeting Abstract One of the notable macroeconomic developments of the last two decades has been the apparent decline in the so-called neutral real rate of interest (or r-star). The declining level of r-star has significantly reduced forecasts of the steady-state federal funds rate associated with “normalized” monetary policy. Because a lower steady-state policy rate implies a heightened probability of reaching the effective lower bound on the federal funds rate in the event of an economic downturn, a debate has opened among academics and policymakers about potential changes in Fed’s monetary policy framework that might ameliorate the lower bound problem. This paper introduces a variation of price-level targeting that satisfies a definition of price stability that requires the central bank to keep the price level within a pre-specified percentage of a pre-specified target path for all time horizons into the future. The framework, referred to as bounded price-level targeting, is compared to other proposed frameworks. The paper discusses the conditions under which bounded price-level targeting is consistent with other proposals. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Business Economics Springer Journals

A new twist on an old framework: bounded price-level targeting

Business Economics , Volume 53 (3): 7 – Jul 1, 2018

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References (28)

Publisher
Springer Journals
Copyright
2018 National Association for Business Economics
ISSN
0007-666X
eISSN
1554-432X
DOI
10.1057/s11369-018-0085-1
Publisher site
See Article on Publisher Site

Abstract

Abstract One of the notable macroeconomic developments of the last two decades has been the apparent decline in the so-called neutral real rate of interest (or r-star). The declining level of r-star has significantly reduced forecasts of the steady-state federal funds rate associated with “normalized” monetary policy. Because a lower steady-state policy rate implies a heightened probability of reaching the effective lower bound on the federal funds rate in the event of an economic downturn, a debate has opened among academics and policymakers about potential changes in Fed’s monetary policy framework that might ameliorate the lower bound problem. This paper introduces a variation of price-level targeting that satisfies a definition of price stability that requires the central bank to keep the price level within a pre-specified percentage of a pre-specified target path for all time horizons into the future. The framework, referred to as bounded price-level targeting, is compared to other proposed frameworks. The paper discusses the conditions under which bounded price-level targeting is consistent with other proposals.

Journal

Business EconomicsSpringer Journals

Published: Jul 1, 2018

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