Price‐Level Targeting and Stabilization Policy |
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| Authors: | ALEKSANDER BERENTSEN CHRISTOPHER WALLER |
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| Institution: | 1. Aleksander Berentsen is at the University of Basel.;2. Christopher Waller is at the Federal Reserve Bank of St. Louis, Department of Economics, University of Notre Dame (E‐mail: cwaller@stls.frb.org). |
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| Abstract: | 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 that effectively smooths consumption across states. |
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| Keywords: | E41 E52 money search stabilization policy |
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