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Price-Level Targeting and Stabilization Policy: A Review

This article reviews arguments in the literature for and against price-level targeting, focusing on its costs and benefits compared with inflation targeting. Benefits of price-level targeting include the effect on forward-looking inflation expectations; the ability to substitute for commitment by a central bank to its future policies; lessening forecast errors; better economic performance in response to real shocks because of lower wage indexation; and a reduction in the problem of the zero lower bound on nominal interest rates. Strict price-level targeting is not appropriate when inflation expectations are not fully forward-looking, and targeting the overall price level may be harmful if there are volatile movements in some of its components.

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Article provided by Bank of Canada in its journal Bank of Canada Review.

Volume (Year): 2009 (2009)
Issue (Month): Spring ()
Pages: 21-31

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Handle: RePEc:bca:bcarev:v:2009:y:2009:i:spring09:p:21-31
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