Finance and Economics Discussion Series (FEDS)
On Targeting Frameworks and Optimal Monetary Policy
Martin Bodenstein and Junzhu Zhao
Speed limit policy, a monetary policy strategy that focuses on stabilizing inflation and the change in the output gap, consistently delivers better welfare outcomes than flexible inflation targeting or flexible price level targeting in empirical New Keynesian models when policymakers lack the ability to commit to future policies. Even if the policymaker can commit under an inflation targeting strategy, the discretionary speed limit policy performs better for most empirically plausible model parameterizations from a normative perspective.
Keywords: delegation, inflation targeting, optimal monetary policy, price level targeting, speed limit policy
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