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Price-level targeting rules and financial shocks: The case of Canada

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  • Dib, Ali
  • Mendicino, Caterina
  • Zhang, Yahong

Abstract

How important are the benefits of low price-level uncertainty in the presence of financial shocks? This paper explores the desirability of price-level path targeting in a small open economy with credit frictions à la Bernanke et al. (1999). The model features credit flows and exogenous shocks that originated in both domestic and international credit markets. Financial shocks, exacerbating the distortion generated by the debt-deflation channel, provide a rational for an interest-rate response to the price-level. Indeed, a price-level targeting rule reduces the trade-off between the nominal debt distortion and the inefficiency generated by nominal price stickiness. The policy implications are based on social welfare evaluations. Parameter's uncertainty does not significantly affect the main results.

Suggested Citation

  • Dib, Ali & Mendicino, Caterina & Zhang, Yahong, 2013. "Price-level targeting rules and financial shocks: The case of Canada," Economic Modelling, Elsevier, vol. 30(C), pages 941-953.
    • Handle: RePEc:eee:ecmode:v:30:y:2013:i:c:p:941-953
    DOI: 10.1016/j.econmod.2012.09.038
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    Cited by:

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    2. Ian Christensen & Paul Corrigan & Caterina Mendicino & Shin‐Ichi Nishiyama, 2016. "Consumption, housing collateral and the Canadian business cycle," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 49(1), pages 207-236, February.
    3. Andreas Beyer & Benoît Coeuré & Caterina Mendicino, 2017. "Foreword – The crisis, ten years after: Lessons learnt for monetary and financial research," Economie et Statistique / Economics and Statistics, Institut National de la Statistique et des Etudes Economiques (INSEE), issue 494-495-4, pages 45-64.
    4. Michael Hatcher & Patrick Minford, 2016. "Stabilisation Policy, Rational Expectations And Price-Level Versus Inflation Targeting: A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 30(2), pages 327-355, April.
    5. Caterina Mendicino & Yahong Zhang, 2016. "Risk Shocks in a Small Open Economy," Working Papers 1602, University of Windsor, Department of Economics.
    6. Nestor Azcona, 2018. "Can Price-Level Targeting Reduce Exchange Rate Volatility?," Eastern Economic Journal, Palgrave Macmillan;Eastern Economic Association, vol. 44(3), pages 400-436, June.
    7. Zhang, Yahong, 2018. "Unemployment fluctuations in a small open-economy model with segmented labour markets: The case of Canada," The Quarterly Review of Economics and Finance, Elsevier, vol. 70(C), pages 6-20.
    8. Mendicino, Caterina & Zhang, Yahong, 2018. "Risk shocks in a small open economy: Business cycle dynamics in Canada," Economic Modelling, Elsevier, vol. 72(C), pages 391-409.
    9. Alessandro Cantelmo & Pietro Cova & Alessandro Notarpietro & Massimiliano Pisani, 2022. "Make-up strategies and exchange rate pass-through in a low-interest-rate environment," Temi di discussione (Economic working papers) 1398, Bank of Italy, Economic Research and International Relations Area.
    10. Balke, Nathan S. & Martínez-García, Enrique & Zeng, Zheng, 2021. "In no uncertain terms: The effect of uncertainty on credit frictions and monetary policy," Economic Modelling, Elsevier, vol. 100(C).

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    More about this item

    Keywords

    Welfare analysis; Interest-rate rules; Financial frictions; Optimal monetary policy;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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