http://www.federalreserve.gov/pubs/feds/2004/200403/200403pap.pdf

Measuring the Effects of Monetary Policy: A Factor-Augmented Vector Autoregressive (FAVAR) Approach * Ben S. Bernanke et al (2003)

If you only target the output gap and nothing else then the price level would be indeterminate. Indeed that’s true of any real variable target.

]]>> The “medium scale model” is considerably more nuanced than the “simple model”.

That serves me right for writing my comment without skimming enough of the paper.

> The output gap approach appears to have some catastrophic consequences too, Figure 3, p.28.

More than that, I’m interested by the discussion in s.4.3, which suggests that an output gap target is long-run indeterminate.

]]>That’s political placation…bend over and grab you…

But then you can scream at year’s end when the price-level craters (barring Fed intervention).

]]>The “medium scale model” is considerably more nuanced than the “simple model”. The output gap approach appears to have some catastrophic consequences too, Figure 3, p.28. ]]>

Taking a quick skim through the paper, the underlying math is normalized to zero inflation and no output trend. The NGDP target reduces to a price-level target, and the inflation target is zero inflation.

The monetary policy function is symmetric with respect to the inflation rate, so they are indeed implementing a pure inflation target with neither ZLB nor ‘inflation ceiling’ characteristics.

In terms of the “real” economy, this paper also assumes that prices and wages are sticky both upwards and downwards with some a priori specified probability. Within these constraints, the analysis finds that NGDP/PL targeting dominates over inflation targeting unless wages (moreso than prices) are almost fully flexible.

An obvious extension of this analysis would be to introduce a more nuanced price/wage stickiness along with trend growth.

]]>Thomas, I haven’t read the paper yet, but generally it’s assumed to be inflation targeting, not inflation ceiling targeting or PL targeting.

Ray, Monetarism has zero effect on output.

]]>Sumner is ecstatic about an alternate universe. Meanwhile in the real world monetarism has been shown to have 3.2% to 13.2% effect on output–out of 100%–nearly trivial.

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