James Peery Cover () (Department of Economics, Finance, and Legal Studies, University of Alabama) Paul Pecorino () (Department of Economics, Finance, and Legal Studies, University of Alabama)
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It is commonly believed that a monetary policy that targets the price level reduces the long-term variability of the price level, but only at the cost of increased variability of both inflation and output. We develop a model in which the one-step-ahead variance of output and the price level are lower under price-level targeting than under inflation targeting. This increased stability under price-level targeting works through an interest-rate channel that, to our knowledge, has not previously been emphasized in the literature. Surprisingly, if the sensitivity of demand to the real rate of interest is high enough, then the variance of inflation can also be lower under price-level targeting than under inflation targeting.
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Volume (Year): 72 (2005) Issue (Month): 1 (July) Pages: 152–166 Download reference. The following formats are available: HTML
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Find related papers by JEL classification: E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
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