Advanced Search
MyIDEAS: Login to save this paper or follow this series

Is Time Ripe for Price Level Path Stability?

Contents:

Author Info

  • Vítor Gaspar
  • Frank Smets
  • David Vestin

Abstract

In the paper, we provide a critical and selective survey of arguments relevant for the assessment of the case for price level path stability (PLPS). Using a standard hybrid new Keynesian model we argue that price level stability provides a natural framework for monetary policy under commitment. There are two main arguments in favour of a PLPS regime. First, it helps overall macroeconomic stability by making expectations operate like automatic stabilizers. Second, under a price level path stability regime, changes in the price level operates like an intertemporal adjustment mechanism, reducing the magnitude of required changes in nominal interest rates. Such a property is particularly relevant as a means to alleviate the importance of the zero bound on nominal interest rates. We also review and discuss the arguments against price level path stability. Finally, we also found, using the Smets and Wouters (2003) model which includes a wide variety of frictions and is estimated for the euro area, that the price level is stationary under optimal policy under commitment. The results obtain when the quasi-difference of inflation is used in the loss function, as in the hybrid new Keynesian model. Overall, the arguments in favour of or against price level path stability depend on the degree of dependence of private sector expectations on the characteristics of the monetary policy regime.Key words: Price Level Stability, Expectations, Adaptive Learning

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.bportugal.pt/en-US/BdP%20Publications%20Research/WP200719.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Banco de Portugal, Economics and Research Department in its series Working Papers with number w200719.

as in new window
Length:
Date of creation: 2007
Date of revision:
Handle: RePEc:ptu:wpaper:w200719

Contact details of provider:
Postal: R. do Ouro, 27, 1100 LISBOA
Phone: 21 321 32 00
Fax: 21 346 48 43
Email:
Web page: http://www.bportugal.pt
More information through EDIRC

Related research

Keywords:

Other versions of this item:

Find related papers by JEL classification:

References

No references listed on IDEAS
You can help add them by filling out this form.

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Giannoni, Marc P., 2014. "Optimal interest-rate rules and inflation stabilization versus price-level stabilization," Journal of Economic Dynamics and Control, Elsevier, vol. 41(C), pages 110-129.
  2. William T. Gavin & Benjamin D. Keen & Michael R. Pakko, 2012. "Taylor-type rules and total factor productivity," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 41-64.
  3. Robert S. Gazzale & Jared C Carbone, 2011. "A Shared Sense of Responsibility: Money Versus Effort Contributions in the Vountary Provision of Public Goods," Department of Economics Working Papers 2011-12, Department of Economics, Williams College.
  4. Kuttner, Kenneth & Posen, Adam, 2011. "How flexible can inflation targeting be and still work?," Discussion Papers 34, Monetary Policy Committee Unit, Bank of England.
  5. Jiri Bohm & Jan Filacek & Ivana Kubicova & Romana Zamazalova, 2011. "Price-Level Targeting - A Real Alternative to Inflation Targeting?," Research and Policy Notes 2011/01, Czech National Bank, Research Department.
  6. Loisel, O., 2005. "Central Bank Reputation in a Forward-Looking Model," Working papers 127, Banque de France.
  7. Andreas Beyer & Vitor Gaspar & Christina Gerberding & Otmar Issing, 2008. "Opting Out of the Great Inflation: German Monetary Policy After the Break Down of Bretton Woods," NBER Working Papers 14596, National Bureau of Economic Research, Inc.
  8. Gino Cateau, 2009. "Optimal Policy under Commitment and Price Level Stationarity," Working Papers 09-8, Bank of Canada.
  9. Iulian Vasile Popescu, 2012. "Price-Level Targeting – A Viable Alternative To Inflation Targeting?," CES Working Papers, Centre for European Studies, Alexandru Ioan Cuza University, vol. 4, pages 809-823, December.
  10. Meh, Césaire A. & Ríos-Rull, José-Víctor & Terajima, Yaz, 2010. "Aggregate and welfare effects of redistribution of wealth under inflation and price-level targeting," Journal of Monetary Economics, Elsevier, vol. 57(6), pages 637-652, September.
  11. Hatcher, Michael C., 2011. "Comparing inflation and price-level targeting: A comprehensive review of the literature," Cardiff Economics Working Papers E2011/22, Cardiff University, Cardiff Business School, Economics Section.
  12. Richard C.K. Burdekin & Kris James Mitchener & Marc D. Weidenmier, 2011. "Irving Fisher and Price-Level Targeting in Austria: Was Silver the Answer?," NBER Working Papers 17123, National Bureau of Economic Research, Inc.
  13. Roberto Billi, 2008. "Price-level targeting and risk management in a low-inflation economy," Research Working Paper RWP 08-09, Federal Reserve Bank of Kansas City.
  14. Sofía Bauducco B. & Rodrigo Caputo G, 2011. "Metas de Nivel de Precios y Metas de Inflación: Una Revisión de la Literatura," Notas de Investigación Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 14(1), pages 55-67, April.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:ptu:wpaper:w200719. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (DEE-NTDD).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.