Browsing by Subject "inflation targeting"

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  • Honkapohja, Seppo; Mitra, Kaushik (2015)
    Bank of Finland Research Discussion Papers 9/2015
    Published in Manchester School, Volume 83, Issue Supplement S2, pages 27–59, September 2015
    We examine global dynamics under learning in New Keynesian models with price level targeting that is subject to the zero lower bound. The role of forward guidance is analyzed under transparency about the policy rule. Properties of transparent and non-transparent regimes are compared to each other and to the corresponding cases of inflation targeting. Robustness properties for different regimes are examined in terms of the domain of attraction of the targeted steady state and volatility of inflation, output and interest rate. We analyze the effect of higher inflation targets and large expectational shocks for the performance of these policy regimes.
  • Välimäki, Tuomas (2021)
    Bank of Finland Bulletin. Blog
    The symmetry of the guideline for the monetary policy stance has recently attracted considerable attention in central banks’ communications. Both the Fed and the ECB have, in their recent strategy reviews, laid out that their preferences are symmetric about the inflation target of 2%. Indeed, the calibration of the inflation target was a key part of the ECB’s strategy review that was published in July.
  • Kilponen, Juha; Kontulainen, Jarmo (2021)
    Bank of Finland. Bulletin 4/2021
    The ECB’s revised monetary policy strategy has now been adopted. The new 2% inflation target is clear and unambiguous. The target is symmetric, meaning both negative and positive deviations of inflation from the target are considered as equally undesirable. Commitment to the symmetric inflation target requires especially forceful or persistent monetary policy measures when interest rates are close to their effective lower bound. This may imply a transitory period in which inflation is moderately above target. A medium-term orientation with the inflation target also allows the ECB to emphasise sustainable growth and full employment in its decision-making. In its monetary policy, the ECB also takes into account environmental sustainability, in line with the new climate-related action plan.
  • Honkapohja, Seppo (2015)
    Bank of Finland Research Discussion Papers 18/2015
    Published in Empirica, Issue 2, 1 May (2016): 235-256
    ​Many central banks have lowered their interest rates close to zero in response to the crisis since 2008. In standard monetary models the zero lower bound (ZLB) constraint implies the existence of a second steady state in addition to the inflation-targeting steady state. Large scale asset purchases (APP) have been used as a tool for easing of monetary policy in the ZLB regime. I provide a theoretical discussion of these issues using a stylized general equilibrium model in a global nonlinear setting. I also review briefly the empirical literature about effects of APP’s.
  • Honkapohja, Seppo; McClung, Nigel (2021)
    Bank of Finland Research Discussion Papers 6/2021
    This paper considers the performance of average inflation targeting (AIT) policy in a New Keynesian model with adaptive learning agents. Our analysis raises concerns regarding robustness of AIT when agents have imperfect knowledge. In particular, the target steady state can be locally unstable under learning if details about the policy are not publicly available. Near the low steady state with interest rates at the zero lower bound, AIT does not necessarily outperform a standard inflation targeting policy. Policymakers can improve outcomes under AIT by (i) targeting a discounted average of inflation, or (ii) communicating the data window for the target.
  • Honkapohja, Seppo; Kaushik, Mitra (2018)
    Bank of Finland Research Discussion Papers 5/2018
    Published in Journal of Monetary Economics 2020 ; 116 ; December https://doi.org/10.1016/j.jmoneco.2019.09.009
    We examine global dynamics under learning in a nonlinear New Keynesian model when monetary policy uses price-level targeting and compare it to inflation targeting. Domain of attraction of the targeted steady state gives a robustness criterion for policy regimes. Robustness of price-level targeting depends on whether a known target path is incorporated into learning. Credibility is measured by accuracy of this forecasting method relative to simple statistical forecasts. Credibility evolves through reinforcement learning. Initial credibility and initial level of target price are key factors influencing performance. Results match the Swedish experience of price level stabilization in 1920's and 30s.
  • Herrala, Risto (2020)
    Bank of Finland Bulletin. Blog
    It has been a year since the inflation rate in India exceeded the target range of 2­–6 percent and started to hover between 6–8 percent (Chart 1). The survey evidence signals that households expect inflation to continue well above the target. Concerning? Perhaps. But we should be mindful that a pandemic creates a truly exceptional set of circumstances for monetary policy authorities in every country.