Determinacy and E-stability with interest rate rules at the zero lower bound

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Title: Determinacy and E-stability with interest rate rules at the zero lower bound
Author: Eo, Yunjong ; McClung, Nigel
Organization: Bank of Finland
Series: Bank of Finland Research Discussion Papers
Series number: 14/2021
Year of publication: 2021
Publication date: 15.11.2021
Pages: 52
Subject (yso): rahapolitiikka; korko; hinnat; inflaatio; odotukset; tavoitteet; säännöt
Keywords: inflaatiotavoite
JEL: E31; E47; E52; E58
Other keywords: Zero Lower Bound; Markov-Switching; Expectations; Price level targeting; Average inflation targeting; Nominal income targeting
Abstract: We evaluate and compare alternative monetary policy rules, namely average inflation targeting, price level targeting, and traditional inflation targeting rules, in a standard New Keynesian model that features recurring, transient zero lower bound regimes. We use determinacy and expectational stability (E-stability) of equilibrium as the criteria for stabilization policy. We find that price level targeting policy, including nominal income targeting as a special case, most effectively promotes determinacy and E-stability among the policy frameworks, whereas standard inflation targeting rules are prone to indeterminacy. Average inflation targeting can induce determinacy and E-stability effectively, provided the averaging window is sufficiently long.

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