When Is Price-Level Targeting a Good Idea?
نویسندگان
چکیده
This paper critically examines a new literature that supports price-level targeting (PT) over inflation targeting (IT).1 This literature shows that it is better for the central bank (the Bank) to gradually wrestle the price level, rather than the inflation rate, back to the target path. PT provides a firm nominal anchor for expectations, and thereby conditions private sector expectations in a way that reduces inflation variability and improves welfare. These recent results appear to contradict the conventional view that PT is a “bad idea” because it increases the variability of inflation and output relative to IT. In this paper, we attempt to sort out these differing views within a standard theoretical framework in which the Bank minimizes a quadratic loss function subject to a log-linear Phillips curve (PC).
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