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Careful Price Level Targeting

In: Monetary Policy in the Context of the Financial Crisis: New Challenges and Lessons

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  • George A. Waters

Abstract

This chapter examines a class of interest rate rules that respond to public expectations and to lagged variables. Varying levels of commitment correspond to varying degrees of response to lagged output and targeting of the price level. If the response rises (unintentionally) above the optimal level, the outcome deteriorates severely. Hence, the optimal level of commitment is sensitive to the method of expectations formation and partial commitment is the robust, optimal policy. The policymaker should adjust the price level toward a target, but complete adjustment is neither necessary nor desirable.

Suggested Citation

  • George A. Waters, 2015. "Careful Price Level Targeting," International Symposia in Economic Theory and Econometrics, in: Monetary Policy in the Context of the Financial Crisis: New Challenges and Lessons, volume 24, pages 29-40, Emerald Group Publishing Limited.
    • Handle: RePEc:eme:isetez:s1571-038620150000024014
    DOI: 10.1108/S1571-038620150000024014
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    References listed on IDEAS

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    1. Carl E. Walsh, 2003. "Monetary Theory and Policy, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232316, December.
    2. Bennett T. McCallum & Edward Nelson, 2004. "Timeless perspective vs. discretionary monetary policy in forward-looking models," Review, Federal Reserve Bank of St. Louis, vol. 86(Mar), pages 43-56.
    3. Andrew Blake, 2001. "A Timeless Perspective on Optimality in Forward-Looking Rational Expectations Models," National Institute of Economic and Social Research (NIESR) Discussion Papers 188, National Institute of Economic and Social Research.
    4. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 115(1), pages 147-180.
    5. Michael Woodford, 1999. "Commentary : how should monetary policy be conducted in an era of price stability?," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 277-316.
    6. George W. Evans & Seppo Honkapohja, 2003. "Expectations and the Stability Problem for Optimal Monetary Policies," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 70(4), pages 807-824.
    7. George W. Evans, 2001. "Expectations in Macroeconomics. Adaptive versus Eductive Learning," Revue Économique, Programme National Persée, vol. 52(3), pages 573-582.
    8. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
    9. Jensen, Christian & McCallum, Bennett T., 2002. "The non-optimality of proposed monetary policy rules under timeless perspective commitment," Economics Letters, Elsevier, vol. 77(2), pages 163-168, October.
    10. Waters, George A., 2009. "Learning, Commitment, And Monetary Policy," Macroeconomic Dynamics, Cambridge University Press, vol. 13(4), pages 421-449, September.
    11. Athanasios Orphanides & John C. Williams, 2006. "Monetary Policy with Imperfect Knowledge," Journal of the European Economic Association, MIT Press, vol. 4(2-3), pages 366-375, 04-05.
    12. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
    13. Waters, George A., 2007. "Regime changes, learning and monetary policy," Journal of Macroeconomics, Elsevier, vol. 29(2), pages 255-282, June.
    14. George Waters, 2011. "Dangers of commitment under rational expectations," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 35(4), pages 371-381, October.
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    More about this item

    Keywords

    learning; monetary policy; interest rate rules; commitment; price level targeting; E52; E31; D84;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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