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The inflation-output variability tradeoff and price-level targets

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Author Info
Robert Dittmar
William T. Gavin
Finn Kydland

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Abstract

In this article, the authors describe a popular monetary policy framework based on a neoclassical Phillips Curve model. Here, the choice between an inflation target and a price-level target depends on characteristics of real output. If the output gap is relatively persistent, then targeting the price level results in a better set of policy options for the central bank. The authors present evidence from the G-10 countries showing that conventionally measured output gaps are highly persistent. The policy implication of assuming rational expectations and this Phillips Curve model is that central banks should set objectives for a price level, not an inflation rate.

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Publisher Info
Article provided by Federal Reserve Bank of St. Louis in its journal Review.

Volume (Year): (1999)
Issue (Month): Jan ()
Pages: 23-32
Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Handle: RePEc:fip:fedlrv:y:1999:i:jan:p:23-32:n:1

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Related research
Keywords: Phillips curve ; Monetary policy ; Inflation (Finance);

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Edward C. Prescott, 1986. "Theory ahead of business cycle measurement," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 9-22. [Downloadable!]
    Other versions:
  2. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June. [Downloadable!] (restricted)
  3. John B. Taylor, 1994. "The inflation/output variability trade-off revisited," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, pages 21-24. [Downloadable!]
  4. Svensson, Lars E O, 1997. "Optimal Inflation Targets, "Conservative" Central Banks, and Linear Inflation Contracts," American Economic Review, American Economic Association, vol. 87(1), pages 98-114, March. [Downloadable!] (restricted)
    Other versions:
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Michael Woodford, 1999. "Commentary : how should monetary policy be conducted in an era of price stability?," Proceedings, Federal Reserve Bank of Kansas City, pages 277-316. [Downloadable!]
  2. Takatoshi Ito & Frederic S. Mishkin, 2004. "Two Decades of Japanese Monetary Policy and the Deflation Problem," NBER Working Papers 10878, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Mervyn King, 1999. "Challenges for monetary policy : new and old," Proceedings, Federal Reserve Bank of Kansas City, pages 11-57. [Downloadable!]
  4. Meenagh, David & Minford, Patrick & Nowell, Eric & Sofat, Prakriti & Srinivasan, Naveen, 2008. "Can the Facts of UK Inflation Persistence be Explained by Nominal Rigidity?," CEPR Discussion Papers 6834, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  5. Frederic S. Mishkin, 2006. "Monetary Policy Strategy: How Did We Get Here?," NBER Working Papers 12515, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  6. Hatcher, Michael C., 2008. "Speed Limit Policies versus Inflation Targeting: A Free Lunch?," Cardiff Economics Working Papers E2008/20, Cardiff University, Cardiff Business School, Economics Section. [Downloadable!]
  7. Stephen G. Cecchetti & Junhan Kim, 2003. "Inflation Targeting, Price-Path Targeting and Output Variability," NBER Working Papers 9672, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  8. David Meenagh & Patrick Minford & Eric Nowell & Prakriti Sofat & Naveen Srinivasan, 2007. "Are the facts of UK inflation persistence to be explained by nominal rigidity or changes in monetary regime?," WEF Working Papers 0028, ESRC World Economy and Finance Research Programme, Birkbeck, University of London. [Downloadable!]
  9. Robert Dittmar & William T. Gavin, 1999. "What do New-Keynesian Phillips Curves imply for price level targeting?," Working Papers 1999-021, Federal Reserve Bank of St. Louis. [Downloadable!]
    Other versions:
  10. Frederic S. Mishkin & Klaus Schmidt-Hebbel, 2001. "One decade of inflation targeting in the world : What do we know and what do we need to know?," Working Papers Central Bank of Chile 101, Central Bank of Chile. [Downloadable!]
    Other versions:
  11. William T. Gavin, 2003. "Inflation targeting: why it works and how to make it work better," Working Papers 2003-027, Federal Reserve Bank of St. Louis. [Downloadable!]
  12. Patrick Minford & Prakriti Sofat, 2004. "An Open Economy Real Business Cycle Model for the UK," Money Macro and Finance (MMF) Research Group Conference 2004 23, Money Macro and Finance Research Group. [Downloadable!]
  13. Osama Sweidan & Fadwa Kalaji, 2005. "The central bank cost constraint and output-inflation variability: a note on Cecchetti and Ehrmann 2000," Economics Bulletin, Economics Bulletin, vol. 5(12), pages 1-6. [Downloadable!]
  14. Malik, Hamza, 2005. "Price Level vs. Nominal Income Targeting: Aggregate Demand Shocks and the Cost Channel of Monetary Policy Transmission," MPRA Paper 456, University Library of Munich, Germany, revised Aug 2006. [Downloadable!]
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