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Working Paper
The Perils of Nominal Targets
A monetary authority can be committed to pursuing an inflation, price-level, or nominal-GDP target yet systematically fail to achieve the prescribed goal. Con- strained by the zero lower bound on the policy rate, the monetary authority is unable to implement its objectives when private-sector expectations stray far enough from the target. Low-inflation expectations become self-fulfilling, resulting in an additional Markov equilibrium in which the monetary authority falls short of the nominal target, average output is below its efficient level, and the policy rate is typically low. Introducing ...
Working Paper
The perils of nominal targets
A monetary authority can be committed to pursuing an inflation, price-level, or nominal output target yet systematically fail to achieve the specified goals. Constrained by the zero lower bound on the policy rate, the monetary authority is unable to implement its objectives when private-sector expectations stray away from the target in the first place. Low-inflation expectations become self-fulfilling, leading to multiple Markov equilibria. Private-sector expectations are anchored on a unique Markov equilibrium if the monetary authority is given a strong stabilization goal for the policy ...