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Business Economics

, Volume 53, Issue 3, pp 156–162 | Cite as

A new twist on an old framework: bounded price-level targeting

  • David Altig
Original Article

Abstract

One of the notable macroeconomic developments of the last two decades has been the apparent decline in the so-called neutral real rate of interest (or r-star). The declining level of r-star has significantly reduced forecasts of the steady-state federal funds rate associated with “normalized” monetary policy. Because a lower steady-state policy rate implies a heightened probability of reaching the effective lower bound on the federal funds rate in the event of an economic downturn, a debate has opened among academics and policymakers about potential changes in Fed’s monetary policy framework that might ameliorate the lower bound problem. This paper introduces a variation of price-level targeting that satisfies a definition of price stability that requires the central bank to keep the price level within a pre-specified percentage of a pre-specified target path for all time horizons into the future. The framework, referred to as bounded price-level targeting, is compared to other proposed frameworks. The paper discusses the conditions under which bounded price-level targeting is consistent with other proposals.

Keywords

Monetary policy framework Price stability Price-level targeting Bounded nominal uncertainty 

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Copyright information

© National Association for Business Economics 2018

Authors and Affiliations

  1. 1.Federal Reserve Bank of ClevelandClevelandUSA

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