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Are bygones not bygones? Modeling price-level targeting with an escape clause and lessons from the gold standard

  • Masson, Paul R.
  • Shukayev, Malik D.

Like the gold standard, price-level targeting (PT) involves not letting past deviations of inflation be bygones; both regimes return the price level (or price of gold) to its target. The experience of suspension of the gold standard in World War I and resumption in the 1920s (for some countries at a different parity) is reviewed. It suggests that, in practice, PT might operate with an escape clause that would allow rebasing of the price target in the face of large shocks. Using a calibrated general equilibrium model, we show that such an escape clause can produce multiple equilibria. For some parameterizations, there is a low credibility equilibrium (with high expectation of a reset) associated with high output volatility and frequent resets. These problems reduce, or reverse, the expectational advantage PT has over inflation targeting.

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Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 33 (2011)
Issue (Month): 2 (June)
Pages: 162-175

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Handle: RePEc:eee:jmacro:v:33:y:2011:i:2:p:162-175
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622617

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