Conferences at Department of Economics, University of Toronto, RCEF 2012: Cities, Open Economies, and Public Policy

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Inflation Targeting, Price-Level Targeting, the Zero Lower Bound, and Indeterminacy

Steven Ambler, Jean-Paul Lam

Last modified: 2012-06-22

Abstract


We compare inflation targeting and price-level targeting in a simple New Keynesian framework, with particular attention to multiple steady-states, regions of indeterminacy in parameter space, and global stability. First, we show that the well-known problem of multiple steady-state equilibria under a Taylor rule with inflation targeting is absent under a modified Taylor rule and price-level targeting. Second, we show that the model’s dynamics in the neighbourhood of the steady state are determinate for a much wider range of parameter values under price-level targeting, in particular for different values of the central bank’s reaction function. Third, we compare the size and shape of the convergent manifolds under the two different monetary policy regimes.

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