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Price-Level versus Inflation Targeting with Financial Market Imperfections

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Author Info
Francisco Covas
Yahong Zhang

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Abstract

This paper compares price-level-path targeting (PT) with inflation targeting (IT) in a sticky-price, dynamic, general equilibrium model augmented with imperfections in both the debt and equity markets. Using a Bayesian approach, we estimate this model for the Canadian economy. We show that the model with both debt and equity market imperfections fits the data better and use it to compare PT versus the estimated current IT regime. We find that in general PT outperforms the current IT regime. However, the gain is lower when financial market imperfections are taken into account.

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File URL: http://www.bankofcanada.ca/en/res/wp/2008/wp08-26.pdf
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Paper provided by Bank of Canada in its series Working Papers with number 08-26.

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Length: 42 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:bca:bocawp:08-26

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Related research
Keywords: Monetary policy framework; Inflation targets; Economic models;

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Find related papers by JEL classification:
E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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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. Meenakshi Basant Roi & Rhys R. Mendes, 2007. "Should Central Banks Adjust Their Target Horizons in Response to House-Price Bubbles?," Discussion Papers 07-4, Bank of Canada. [Downloadable!]
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    Other versions:
  3. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393 Elsevier. [Downloadable!] (restricted)
    Other versions:
  4. Urban Jermann & Vincenzo Quadrini, 2006. "Financial Innovations and Macroeconomic Volatility," NBER Working Papers 12308, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. Smets, Frank, 2003. "Maintaining price stability: how long is the medium term?," Journal of Monetary Economics, Elsevier, vol. 50(6), pages 1293-1309, September. [Downloadable!] (restricted)
  6. Stephanie Schmitt-Grohé & Martín Uribe, 2006. "Optimal fiscal and monetary policy in a medium-scale macroeconomic model," Working Paper Series 612, European Central Bank. [Downloadable!]
  7. Ian Christensen & Ali Dib, 2008. "The Financial Accelerator in an Estimated New Keynesian Model," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(1), pages 155-178, January. [Downloadable!] (restricted)
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    Other versions:
  9. Francisco Covas & Wouter J. den Haan, 2006. "The Role of Debt and Equity Finance over the Business Cycle," Working Papers 06-45, Bank of Canada. [Downloadable!]
    Other versions:
  10. Césaire A. Meh & José-Victor Rios-Rull & Yaz Terajima, 2008. "Aggregate and Welfare Effects of Redistribution of Wealth Under Inflation and Price-Level Targeting," Working Papers 08-31, Bank of Canada. [Downloadable!]
  11. Simon Gilchrist & Masashi Saito, 2006. "Expectations, Asset Prices, and Monetary Policy: The Role of Learning," NBER Working Papers 12442, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  15. Stephanie Schmitt-Grohé & Martín Uribe, 2006. "Optimal Fiscal and Monetary Policy in a Medium-Scale Macroeconomic Model," NBER Chapters, in: NBER Macroeconomics Annual 2005, Volume 20, pages 383-462 National Bureau of Economic Research, Inc. [Downloadable!]
  16. Fama, Eugene F. & French, Kenneth R., 2005. "Financing decisions: who issues stock?," Journal of Financial Economics, Elsevier, vol. 76(3), pages 549-582, June. [Downloadable!] (restricted)
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