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Policymakers often use the output gap, a noisy signal of economic activity, as a guide for setting monetary policy. Noise in the data argues for policy caution. At the same time, the zero bound on nominal interest rates constrains the central bank's ability to stimulate the economy during...
Persistent link: https://www.econbiz.de/10013104578
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...
Persistent link: https://www.econbiz.de/10013079819
two authorities make policy decisions simultaneously, inflation conservatism causes fiscal overspending. But if fiscal … policy is determined before monetary policy, inflation conservatism imposes fiscal discipline. These results clarify that in … our setting the value of inflation conservatism depends crucially on the timing of policy decisions …
Persistent link: https://www.econbiz.de/10013073355