Essays on monetary policy
Abstract: This thesis consists of four papers investigating different aspects of the interaction between monetary policy and expectations.Price-Level Targeting Versus Inflation Targeting in a Forward-Looking Model examines a price-level target in a model with a forward-looking Calvo-Taylor Phillips curve. Contrary to conventional wisdom, it is found that price-level targeting leads to a better trade-off between inflation and output-gap variability than inflation targeting, when the central bank acts under discretion. In some cases, price-level targeting under discretion results in the same equilibrium as inflation targeting under commitment.Average Inflation Targeting demonstrates that when the Phillips curve has forward-looking components, a goal for average inflation will cause inflation expectations to change in a way that improves the short-run trade-off faced by the monetary policy maker. In purely forward-looking models, average inflation targeting is dominated by price level targeting. But we also demonstrate that in models where the Phillips curve has both forward- and backward-looking components, there are cases when the average inflation target provides more efficient outcomes than both `ordinary' one-period inflation targeting and price level targeting.The Size of the Commitment Problem studies the size of the difference between commitment and discretion in forward-looking models. This size can be interpreted as a welfare-loss experienced when the central bank is unable to commit. The size is found to vary non-linearly with the model parameters, and to be quite large when there is a high degree of shock persistence.Prediction of Future Risk-Neutral Interest Rate Densities evaluates two different approaches to inferring expectations of future interest rates from asset prices. One is based on bond data and builds on the Black Derman and Toy model. The other is based on option prices. The main conclusion is that the option based model works well, whereas the bond based model has difficulties in capturing aspects of the true distribution.
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