IDEAS home Printed from https://ideas.repec.org/a/pal/buseco/v53y2018i3d10.1057_s11369-018-0085-1.html
   My bibliography  Save this article

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

Author

Listed:
  • David Altig

    (Federal Reserve Bank of Cleveland)

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.

Suggested Citation

  • David Altig, 2018. "A new twist on an old framework: bounded price-level targeting," Business Economics, Palgrave Macmillan;National Association for Business Economics, vol. 53(3), pages 156-162, July.
    • Handle: RePEc:pal:buseco:v:53:y:2018:i:3:d:10.1057_s11369-018-0085-1
    DOI: 10.1057/s11369-018-0085-1
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1057/s11369-018-0085-1
    File Function: Abstract
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1057/s11369-018-0085-1?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Eric Rosengren, 2018. "Considering alternative monetary policy frameworks: an inflation range with an adjustable inflation target: remarks at the Money, Models, & Digital Innovation Conference, Global Interdependence Center," Speech 126, Federal Reserve Bank of Boston.
    2. Janet L Yellen, 2006. "Enhancing Fed Credibility," Business Economics, Palgrave Macmillan;National Association for Business Economics, vol. 41(2), pages 7-13, April.
    3. Amber Wadsworth, 2017. "An international comparison of inflation-targeting frameworks," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 80, pages 1-34, August.
    4. James B. Bullard, 2012. "Price level targeting: the Fed has it about right," Speech 205, Federal Reserve Bank of St. Louis.
    5. Charles L. Evans, 2012. "Monetary Policy in a Low‐Inflation Environment: Developing a State‐Contingent Price‐Level Target," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(s1), pages 147-155, February.
    6. David L. Reifschneider & John C. Williams, 2000. "Three lessons for monetary policy in a low-inflation era," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, pages 936-978.
    7. Loretta J. Mester, 2018. "Remarks on the FOMC’s Monetary Policy Framework; 02-23-2018: Panel Remarks at the 2018 U.S. Monetary Policy Forum, Sponsored by the Initiative on Global Markets at the University of Chicago Booth Scho," Speech 94, Federal Reserve Bank of Cleveland.
    8. repec:fip:fedlps:y:2012:i:october4 is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Honkapohja, Seppo & Mitra, Kaushik, 2020. "Price level targeting with evolving credibility," Journal of Monetary Economics, Elsevier, vol. 116(C), pages 88-103.
    2. Honkapohja, Seppo & Mitra, Kaushik, 2020. "Price level targeting with evolving credibility," Journal of Monetary Economics, Elsevier, vol. 116(C), pages 88-103.
    3. Seppo Honkapohja, 2016. "Monetary policies to counter the zero interest rate: an overview of research," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 43(2), pages 235-256, May.
    4. Proaño, Christian R. & Lojak, Benjamin, 2021. "Monetary Policy with a State-Dependent Inflation Target in a Behavioral Two-Country Monetary Union Model," Journal of Economic Dynamics and Control, Elsevier, vol. 133(C).
    5. Takuji Kawamoto & Jouchi Nakajima & Tomoaki Mikami, 2021. "Supplementary Paper Series for the "Assessment" (3): Inflation-Overshooting Commitment:An Analysis Using a Macroeconomic Model," Bank of Japan Working Paper Series 21-E-9, Bank of Japan.
    6. Krane, Spencer David & Melosi, Leonardo & Rottner, Matthias, 2023. "Learning monetary policy strategies at the effective lower bound with sudden surprises," Discussion Papers 22/2023, Deutsche Bundesbank.
    7. Mitra, Kaushik & Honkapohja, Seppo, 2014. "Targeting nominal GDP or prices: Guidance and expectation dynamics," Bank of Finland Research Discussion Papers 4/2014, Bank of Finland.
    8. Thomas M. Mertens & John C. Williams, 2019. "Tying down the anchor: monetary policy rules and the lower bound on interest rates," Staff Reports 887, Federal Reserve Bank of New York.
    9. Cecion, Martina & Coenen, Günter & Gerke, Rafael & Le Bihan, Hervé & Motto, Roberto & Aguilar, Pablo & Ajevskis, Viktors & Giesen, Sebastian & Albertazzi, Ugo & Gilbert, Niels & Al-Haschimi, Alexander, 2021. "The ECB’s price stability framework: past experience, and current and future challenges," Occasional Paper Series 269, European Central Bank.
    10. Seppo Honkapohja & Kaushik Mitra, 2015. "Comparing Inflation and Price-Level Targeting: The Role of Forward Guidance and Transparency," Manchester School, University of Manchester, vol. 83, pages 27-59, December.
    11. Jonas E. Arias & Martin Bodenstein & Hess T. Chung & Thorsten Drautzburg & Andrea Raffo, 2020. "Alternative Strategies: How Do They Work? How Might They Help?," Finance and Economics Discussion Series 2020-068, Board of Governors of the Federal Reserve System (U.S.).
    12. Guido Ascari & Argia M. Sbordone, 2014. "The Macroeconomics of Trend Inflation," Journal of Economic Literature, American Economic Association, vol. 52(3), pages 679-739, September.
    13. Honkapohja, Seppo & McClung, Nigel, 2021. "On Robustness of Average Inflation Targeting," CEPR Discussion Papers 16001, C.E.P.R. Discussion Papers.
    14. Richard H. Clarida, 2020. "The Federal Reserve's New Framework: Context and Consequences: a speech at the "The Economy and Monetary Policy" event hosted by the Hutchins Center on Fiscal and Monetary Policy at the Broo," Speech 89055, Board of Governors of the Federal Reserve System (U.S.).
    15. Spencer D. Krane & Leonardo Melosi & Matthias Rottner, 2023. "Learning Monetary Policy Strategies at the Effective Lower Bound with Sudden Surprises," Working Paper Series WP 2023-22, Federal Reserve Bank of Chicago.
    16. Martin Bodenstein & James Hebden & Fabian Winkler, 2019. "Learning and Misperception: Implications for Price-Level Targeting," Finance and Economics Discussion Series 2019-078, Board of Governors of the Federal Reserve System (U.S.).
    17. Richard H. Clarida, 2022. "The Federal Reserve's New Framework: Context and Consequences," Finance and Economics Discussion Series 2022-001, Board of Governors of the Federal Reserve System (U.S.).
    18. repec:zbw:bofrdp:2018_005 is not listed on IDEAS
    19. repec:zbw:bofrdp:2021_006 is not listed on IDEAS
    20. Dr. Gregor Bäurle & Daniel Kaufmann, 2014. "Exchange rate and price dynamics in a small open economy - the role of the zero lower bound and monetary policy regimes," Working Papers 2014-10, Swiss National Bank.
    21. Lucian Croitoru, 2016. "Are We Systematically Wrong when Estimating Potential Output and the Natural Rate of Interest?," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 128-151, June.
    22. KAMKOUM, Arnaud Cedric, 2023. "The Federal Reserve’s Response to the Global Financial Crisis and its Effects: An Interrupted Time-Series Analysis of the Impact of its Quantitative Easing Programs," Thesis Commons d7pvg, Center for Open Science.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pal:buseco:v:53:y:2018:i:3:d:10.1057_s11369-018-0085-1. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.palgrave-journals.com/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.