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Federal Reserve Bank of St. Louis
Working Papers
Price level targeting and stabilization policy
Aleksander Berentsen
Christopher J. Waller
Abstract

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 which effectively smooths consumption across states.


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Aleksander Berentsen & Christopher J. Waller, Price level targeting and stabilization policy, Federal Reserve Bank of St. Louis, Working Papers 2009-033, 2009.
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Keywords: Monetary policy ; Econometric models
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