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Adopting Price-Level Targeting under Imperfect Credibility in ToTEM

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Author Info
Gino Cateau
Oleksiy Kryvtsov
Malik Shukayev
Alexander Ueberfeldt

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Abstract

Using the Bank of Canada's main projection and policy-analysis model, ToTEM, this paper measures the welfare gains of switching from inflation targeting to price-level targeting under imperfect credibility. Following the policy change, private agents assign a probability to the event that the policy-maker will revert to inflation-targeting next period. As this probability decreases and imperfect credibility abates, inflation expectations in the economy become consistent with price-level targeting. The paper finds a large welfare gain when imperfect credibility is short-lived. The gain becomes smaller with persisting imperfect credibility, turning to a loss if it lasts more than 13 years.

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File URL: http://www.bankofcanada.ca/en/res/wp/2009/wp09-17.pdf
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Publisher Info
Paper provided by Bank of Canada in its series Working Papers with number 09-17.

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Length: 34 pages
Date of creation: 2009
Date of revision:
Handle: RePEc:bca:bocawp:09-17

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Related research
Keywords: Monetary policy framework; Monetary policy implementation;

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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This page was last updated on 2009-11-24.

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