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Working Paper 2009-033B

"Price Level Targeting and Stabilization Policy"
by Aleksander Berentsen, and Christopher J. Waller

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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Category > Monetary Policy/Macroeconomics
Author > Christopher J. Waller
Research Papers and Publications: JEL Code > E40
Research Papers and Publications: JEL Code > E50