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Price-level targeting and stabilization policy

journal contribution
posted on 2011-10-01, 00:00 authored by A Berentsen, Christopher Waller
We construct a dynamic stochastic general equilibrium model to study optimal monetary stabilization policy. Prices are fully flexible and money is essential for trade. Our main result is that if the central bank pursues a price-level target, it can control inflation expectations and improve welfare by stabilizing short-run shocks to the economy. The optimal policy involves smoothing nominal interest rates that effectively smooths consumption across states.

History

Journal

Journal of money, credit and banking

Volume

43

Issue

s2

Pagination

559 - 580

Publisher

Wiley-Blackwell

Location

London, Eng.

ISSN

0022-2879

Language

eng

Publication classification

C1.1 Refereed article in a scholarly journal; C Journal article

Copyright notice

2011, The Ohio State University

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