Advanced Search
MyIDEAS: Login to save this article or follow this journal

Beyond inflation targeting: should central banks target the price level?

Contents:

Author Info

  • George A. Kahn

Abstract

Over the last two decades, many central banks have adopted formal inflation targets to guide the conduct of monetary policy. During this period, inflation has come down in many countries and been relatively stable by historical standards. This favorable performance to date, however, has not stopped economists and policymakers from considering other approaches to the conduct of policy. One idea that has gained considerable attention is price-level targeting. Under a price-level target, a central bank would adjust its policy instrument—typically a short-term interest rate—in an effort to achieve a pre-announced level of a particular price index over the medium term. In contrast, under an inflation target, a central bank tries to achieve a pre-announced rate of inflation—that is, the change in the price level—over the medium term. ; Kahn examines price-level targeting and discusses why policymakers may be reluctant to adopt such a strategy. Price-level targeting offers a number of potential benefits over inflation targeting. While inflation targets have helped stabilize inflation, the future level of prices remains uncertain. Price-level targets would by definition remove much of this uncertainty. Price-level targeting also has the advantage of potentially generating greater stability of both output and inflation. Particularly in the current low-inflation environment, where nominal policy rates have fallen near zero, price-level targeting may help support expectations of a positive inflation rate. These inflation expectations, in turn, would keep real interest rates negative, thereby stimulating interest-sensitive spending and contributing to economic recovery. ; Yet the benefits of price-level targeting may be relatively small and uncertain. In addition, this strategy is untested in practice (except for Sweden in the 1930s) and would present challenges for policymakers in communicating with the public regarding the objectives and direction of policy over the medium run. As a result, price level targeting will not likely be adopted by central bankers without considerable further research or a dramatic deterioration in economic performance that leads policymakers to fundamentally reconsider how they conduct monetary policy.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.kansascityfed.org/PUBLICAT/ECONREV/pdf/09q3kahn.pdf
Download Restriction: no

Bibliographic Info

Article provided by Federal Reserve Bank of Kansas City in its journal Economic Review.

Volume (Year): (2009)
Issue (Month): Q III ()
Pages: 35-64

as in new window
Handle: RePEc:fip:fedker:y:2009:i:qiii:p:35-64:n:v.94no.3

Contact details of provider:
Postal: One Memorial Drive, Kansas City, MO 64198
Phone: (816) 881-2254
Web page: http://www.kansascityfed.org
More information through EDIRC

Order Information:
Email:

Related research

Keywords:

References

No references listed on IDEAS
You can help add them by filling out this form.

Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Le péril des cibles nominales
    by ? in D'un champ l'autre on 2014-01-11 12:10:00
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Jiri Bohm & Jan Filacek & Ivana Kubicova & Romana Zamazalova, 2011. "Price-Level Targeting - A Real Alternative to Inflation Targeting?," Research and Policy Notes 2011/01, Czech National Bank, Research Department.
  2. Eagle, David M., 2012. "Nominal GDP targeting for a speedier economic recovery," MPRA Paper 39821, University Library of Munich, Germany.
  3. Julian A. Parra-Polania & Luisa F. Acuña-Roa, 2013. "Price-Level Targeting: an omelette that requires breaking some Inflation-Targeting eggs?," BORRADORES DE ECONOMIA 010984, BANCO DE LA REPÚBLICA.
  4. Steven Ambler, 2014. "Price-Level Targeting: A Post-Mortem?," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 400, February.
  5. Richard C.K. Burdekin & Kris James Mitchener & Marc D. Weidenmier, 2012. "Irving Fisher and Price‐Level Targeting in Austria: Was Silver the Answer?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(4), pages 733-750, 06.
  6. 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.
  7. Carl E. Walsh, 2009. "Using monetary policy to stabilize economic activity," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 245-296.
  8. Lars E.O. Svensson, 2010. "Inflation Targeting," NBER Working Papers 16654, National Bureau of Economic Research, Inc.
  9. Iulian Vasile Popescu, 2012. "Price-Level Targeting – A Viable Alternative To Inflation Targeting?," CES Working Papers, Centre for European Studies, Alexandru Ioan Cuza University, vol. 4, pages 809-823, December.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:fip:fedker:y:2009:i:qiii:p:35-64:n:v.94no.3. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (LDayrit).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.