Price level targeting (without base drift) and inflation targeting (with base drift) are compared under commitment and discretion, with persistence in unemployment. Price level targeting is often said to imply more short-run inflation variability and thereby more employment variability than inflation targeting. Counter to this conventional wisdom, under discretion a price level target results in lower inflation variability than an inflation target (if unemployment is at least moderately persistent). A price level target also eliminates the inflation bias under discretion and, as is well known, reduces long-term price variability. Society may be better off assigning a price level target to the central bank even if its preferences correspond to inflation targeting. A price level target thus appears to have more advantages than commonly acknowledged.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
5719.
Length: Date of creation: Aug 1996 Date of revision: Handle: RePEc:nbr:nberwo:5719
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Find related papers by JEL classification: D42 - Microeconomics - - Market Structure and Pricing - - - Monopoly E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
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