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Price-Level Uncertainty, Price-Level Targeting, and Nominal Debt Contracts

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Abstract

Many central banks around the world have embraced inflation targeting as a monetary policy framework. Interest is growing, however, in price-level targeting as an alternative. The choice of frameworks has important consequences for financial contracts, most of which are not fully indexed to the price level. Changes in the price level therefore lead to changes in the real value of contracts. Price-level targeting would reduce the size of these changes in real wealth and decrease uncertainty about the future price level. This article assesses the merits of price-level targeting vis-à-vis inflation targeting from a debt-revaluation perspective, with a focus on channels affecting risk premiums, the maturities of nominal debt contracts, and redistribution of wealth. A general conclusion flowing from the analysis is that accounting for the revaluation of nominal debts and assets strengthens the relative merits of price-level targeting compared with inflation-targeting.

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Bibliographic Info

Article provided by Bank of Canada in its journal Bank of Canada Review.

Volume (Year): 2009 (2009)
Issue (Month): Spring ()
Pages: 33-43

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Handle: RePEc:bca:bcarev:v:2009:y:2009:i:spring09:p:33-43

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Cited by:
  1. Guido Ascari & Argia M. Sbordone, 2013. "The Macroeconomics of Trend Inflation," DEM Working Papers Series 053, University of Pavia, Department of Economics and Management.
  2. Michael Hatcher, 2013. "Aggregate and welfare effects of long run inflation risk under inflation and price-level targeting," Working Papers, Business School - Economics, University of Glasgow 2013_03, Business School - Economics, University of Glasgow.
  3. Evan F. Koenig, 2013. "Like a Good Neighbor: Monetary Policy, Financial Stability, and the Distribution of Risk," International Journal of Central Banking, International Journal of Central Banking, International Journal of Central Banking, vol. 9(2), pages 57-82, June.
  4. Michael, Hatcher, 2013. "Indexed versus nominal government debt under inflation and price-level targeting," SIRE Discussion Papers, Scottish Institute for Research in Economics (SIRE) 2013-56, Scottish Institute for Research in Economics (SIRE).
  5. Hatcher, Michael C., 2011. "Comparing inflation and price-level targeting: A comprehensive review of the literature," Cardiff Economics Working Papers E2011/22, Cardiff University, Cardiff Business School, Economics Section.

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