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Do Inflation-Targeting Central Banks Implicitly Target the Price Level?

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  • RUGE-MURCIA, Francisco J.

Abstract

This paper reports graphical and statistical evidence that the inflation targeting regimes in Canada and the UK - but not in Australia, New Zealand, or Sweden - actually resemble price-level targeting. In particular, the price level closely tracks the path implied by the inflation target, and the time-series predictions of the "bygones-are-bygones" version of inflation targeting are rejected by the data in favor of those implied by price-level targeting. These results indicate heterogeneity in the actual application of inflation targeting across countries and, for Canada and the UK, imply that the characterization of inflation targeting as a policy where shocks are accommodated is at odds with the data. Moreover, up to extent that their current policies already resemble price-level targeting, the welfare gains of replacing inflation with (explicit) price-level targeting are likely to be small.

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File URL: http://hdl.handle.net/1866/4000
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Bibliographic Info

Paper provided by Universite de Montreal, Departement de sciences economiques in its series Cahiers de recherche with number 2009-15.

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Length: 20 pages
Date of creation: 2009
Date of revision:
Handle: RePEc:mtl:montde:2009-15

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Keywords: Inflation-targeting; price-level targeting; unit-root tests;

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References

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  1. Svensson, Lars E O, 1999. "Price-Level Targeting versus Inflation Targeting: A Free Lunch?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(3), pages 277-95, August.
  2. Ondra Kamenik & Heesun Kiem & Vladimir Klyuev & Douglas Laxton, 2013. "Why Is Canada's Price Level So Predictable?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(1), pages 71-85, 02.
  3. Shiller, Robert J. & Perron, Pierre, 1985. "Testing the random walk hypothesis : Power versus frequency of observation," Economics Letters, Elsevier, vol. 18(4), pages 381-386.
  4. Alexander L. Wolman, 1999. "Real Implications of the Zero Bound on Nominal Interest Rates," Computing in Economics and Finance 1999 1152, Society for Computational Economics.
  5. Perron, P, 1988. "The Great Crash, The Oil Price Shock And The Unit Root Hypothesis," Papers 338, Princeton, Department of Economics - Econometric Research Program.
  6. Vestin, David, 2006. "Price-level versus inflation targeting," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1361-1376, October.
  7. Woodford, Michael, 1999. "Optimal monetary policy inertia," CFS Working Paper Series 1999/09, Center for Financial Studies (CFS).
  8. Serena Ng & Pierre Perron, 1997. "Lag Length Selection and the Construction of Unit Root Tests with Good Size and Power," Boston College Working Papers in Economics 369, Boston College Department of Economics, revised 01 Sep 2000.
  9. Woodford, M., 1999. "Optimal Monetary Policy Inertia.," Papers 666, Stockholm - International Economic Studies.
  10. Ball, Laurence & Gregory Mankiw, N. & Reis, Ricardo, 2005. "Monetary policy for inattentive economies," Journal of Monetary Economics, Elsevier, vol. 52(4), pages 703-725, May.
  11. Richard Clarida & Jordi Gali & Mark Gertler, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," NBER Working Papers 7147, National Bureau of Economic Research, Inc.
  12. Jón Steinsson, 2000. "Optimal monetary policy in an economy with inflation persistence," Economics wp11, Department of Economics, Central bank of Iceland.
  13. Gauti B. Eggertsson & Michael Woodford, 2003. "The Zero Bound on Interest Rates and Optimal Monetary Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 139-235.
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Citations

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Cited by:
  1. Graham M. Voss & M. Chaban, 2012. "National and Provincial Inflation in Canada: Experiences under Inflation Targeting," Department Discussion Papers 1201, Department of Economics, University of Victoria.
  2. Pierre L. Siklos, 2011. "Communication for Multi-Taskers: Perspectives on Dealing with Both Monetary Policy and Financial Stability," Working Paper Series 04_11, The Rimini Centre for Economic Analysis.

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