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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 in?ation targeting across countries and, for Canada and the UK, imply that the characterization of in?ation 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 in?ation with (explicit) price-level targeting are likely to be small.

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Bibliographic Info

Paper provided by Centre interuniversitaire de recherche en économie quantitative, CIREQ in its series Cahiers de recherche with number 16-2009.

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Length: 20 pages
Date of creation: 2009
Date of revision:
Handle: RePEc:mtl:montec:16-2009

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

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References

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  1. 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.
  2. Richard Clarida & Jordi Galí & Mark Gertler, 1997. "The science of monetary policy: A new Keynesian perspective," Economics Working Papers 356, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 1999.
  3. Woodford, M., 1999. "Optimal Monetary Policy Inertia.," Papers 666, Stockholm - International Economic Studies.
  4. Jón Steinsson, 2000. "Optimal monetary policy in an economy with inflation persistence," Economics wp11, Department of Economics, Central bank of Iceland.
  5. Alexander L. Wolman, 2003. "Real implications of the zero bound on nominal interest rates," Working Paper 03-15, Federal Reserve Bank of Richmond.
  6. Pierre Perron & Robert J. Shiller, 1984. "Testing the Random Walk Hypothesis: Power Versus Frequency of Observation," Cowles Foundation Discussion Papers 732, Cowles Foundation for Research in Economics, Yale University.
  7. Perron, Pierre, 1989. "The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Econometrica, Econometric Society, vol. 57(6), pages 1361-1401, November.
  8. Vladimir Klyuev & Heesun Kiem & Ondra Kamenik & Douglas Laxton, 2008. "Why is Canada's Price Level so Predictable?," IMF Working Papers 08/25, International Monetary Fund.
  9. 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.
  10. 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.
  11. Vestin, David, 2006. "Price-level versus inflation targeting," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1361-1376, October.
  12. Svensson, Lars E O, 1996. "Price-level Targeting versus Inflation Targeting: A Free Lunch?," CEPR Discussion Papers 1510, C.E.P.R. Discussion Papers.
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Cited by:
  1. Jiri Bohm & Jan Filacek, 2012. "Price-Level Targeting–A Real Alternative to Inflation Targeting?," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 62(1), pages 2-26, February.
  2. 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.
  3. 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.
  4. Eurilton Araújo & Débora Gouveia, 2013. "Calvo-type rules and the forward-looking behavior of inflation targeting central banks," Economics Bulletin, AccessEcon, vol. 33(3), pages 2042-2051.

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