Is Inflation Targeting a Strategy Past its Sell-by Date?

Abstract

The paper compares the main monetary policy strategies to assess which one is the best performing in terms of both minimising the volatility of inflation and the output-gap and reducing the probability of falling into a liquidity trap. The strategies differ in the degree of history dependence and are assessed by means of a three-equation New Keynesian DSGE model, which is estimated with Bayesian methods on euro area data. Only optimal rules are considered for each strategy.