Determinacy and E-Stability with Interest Rate Rules at the Zero Lower Bound

Yunjong Eo, Nigel Mcclung

Research output: Contribution to journalArticlepeer-review

Abstract

We evaluate and compare alternative interest rate rules, namely, average inflation targeting (AIT), price-level targeting (PLT), and traditional inflation targeting rules, in a standard New Keynesian model that features recurring, transient zero lower bound regimes. We use determinacy and expectational stability (E-stability) of equilibrium as the criteria for stabilization policy. We find that PLT policy, including nominal GDP targeting as a special case, most effectively promotes determinacy and E-stability among the policy frameworks, whereas standard inflation targeting rules are prone to indeterminacy. AIT can induce determinacy and E-stability effectively, provided the averaging window is sufficiently long.

Original languageEnglish
JournalJournal of Money, Credit and Banking
DOIs
Publication statusAccepted/In press - 2024

Bibliographical note

Publisher Copyright:
© 2024 The Ohio State University.

Keywords

  • average inflation targeting
  • expectations
  • Markov-switching
  • nominal GDP targeting
  • price-level targeting
  • zero lower bound

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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