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Price-level uncertainty and inflation targeting

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Author Info

  • Robert Dittmar
  • William T. Gavin
  • Finn E. Kydland

Abstract

In this paper, Dittmar, Gavin and Kydland make two points about commonly proposed rules for inflation targeting. First, they argue that there is a great deal of uncertainty about the price level and inflation inherent in current proposals to target inflation. They show that the degree to which the central bank cares about the real economy can have a large impact on price level (and inflation) uncertainty. They find that the magnitudes of uncertainty that prevailed across the G-10 throughout the last four decades are the expected consequence of commonly proposed inflation-targeting regimes. Second, they show that if central banks want both to stabilize business cycle fluctuations and to achieve price stability, then it may be useful to adopt a long-term objective for the price level.

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Bibliographic Info

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

Volume (Year): (1999)
Issue (Month): Jul ()
Pages: 23-34

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Handle: RePEc:fip:fedlrv:y:1999:i:jul:p:23-34:n:v.81no.4

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Keywords: Monetary policy ; Inflation (Finance);

References

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  1. Glenn D. Rudebusch & Lars E. O. Svensson, 1998. "Policy rules for inflation targeting," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
  2. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
  3. 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.
  4. John C. Williams, 2003. "Simple rules for monetary policy," Economic Review, Federal Reserve Bank of San Francisco, pages 1-12.
  5. William T. Gavin & Finn E. Kydland, 1996. "Endogenous money supply and the business cycle," Working Paper 9605, Federal Reserve Bank of Cleveland.
  6. Brunner, Karl & Meltzer, Allan H., 1976. "The Phillips curve," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 1-18, January.
  7. Pierre L. Siklos, 1999. "Inflation-target design: changing inflation performance and persistence in industrial countries," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 46-58.
  8. Robert Dittmar & William T. Gavin, 2000. "What do New-Keynesian Phillips Curves imply for price-level targeting?," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 21-30.
  9. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  10. Bennett T. McCallum, 1997. "Issues in the Design of Monetary Policy Rules," NBER Working Papers 6016, National Bureau of Economic Research, Inc.
  11. Balke, Nathan S. & Emery, Kenneth M., 1994. "The algebra of price stability," Journal of Macroeconomics, Elsevier, vol. 16(1), pages 77-97.
  12. Ben S. Bernanke, 1994. "The Macroeconomics of the Great Depression: A Comparative Approach," NBER Working Papers 4814, National Bureau of Economic Research, Inc.
  13. Stephen G. Cecchetti, 1998. "Policy rules and targets: framing the central banker's problem," Economic Policy Review, Federal Reserve Bank of New York, issue Jun, pages 1-14.
  14. Michael T. Kiley, 1998. "Monetary policy under neoclassical and New-Keynesian Phillips Curves, with an application to price level and inflation targeting," Finance and Economics Discussion Series 1998-27, Board of Governors of the Federal Reserve System (U.S.).
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Citations

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Cited by:
  1. Ali M. Kutan & Josef C. Brada, 2000. "The evolution of monetary policy in transition economies," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 31-40.
  2. Michael Parkin, 2009. "What is the Ideal Monetary Policy Regime? Improving the Bank of Canada's Inflation-targeting Program," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 279, January.
  3. Michael D. Bordo & Robert Dittmar & William T. Gavin, 2006. "Gold, fiat money and price stability," Working Papers 2003-014, Federal Reserve Bank of St. Louis.
  4. Nicoletta Batini & Anthony Yates, 2001. "Hybrid inflation and price level targeting," Bank of England working papers 135, Bank of England.
  5. Hatcher, Michael, 2013. "The Inflation Risk Premium on Government Debt in an Overlapping Generations Model," SIRE Discussion Papers 2013-81, Scottish Institute for Research in Economics (SIRE).
  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. Berument, Hakan & Yuksel, Ebru, 2007. "Effects of adopting inflation targeting regimes on inflation variability," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 375(1), pages 265-273.
  8. Douch, Mohamed & Essadam, Naceur, 2008. "Monetary policy conduct: A hybrid framework," MPRA Paper 20715, University Library of Munich, Germany.
  9. Oleksiy Kryvtsov & Malik Shukayev & Alexander Ueberfeldt, 2007. "Optimal Monetary Policy and Price Stability Over the Long-Run," Working Papers 07-26, Bank of Canada.
  10. William T. Gavin & Benjamin D. Keen & Michael R. Pakko, 2007. "Inflation risk and optimal monetary policy," Working Papers 2006-035, Federal Reserve Bank of St. Louis.

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