Price Level Targeting vs. Inflation Targeting: A Free Lunch?
AbstractPrice 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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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5719.
Date of creation: Aug 1996
Date of revision:
Publication status: published as Journal of Money, Credit and Banking, Vol. 31 (1999): 277-295.
Note: IFM ME
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Other versions of this item:
- Svensson, L-E-O, 1996. "Price Level Targeting vs Inflation Targeting : A free Lunch?," Papers 614, Stockholm - International Economic Studies.
- Svensson, Lars E.O., 1997. "Price Level Targeting vs. Inflation Targeting: A Free Lunch?," Seminar Papers 614, Stockholm University, Institute for International Economic Studies.
- 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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