Beyond inflation targeting: should central banks target the price level?
Over the last two decades, many central banks have adopted formal inflation targets to guide the conduct of monetary policy. During this period, inflation has come down in many countries and been relatively stable by historical standards. This favorable performance to date, however, has not stopped economists and policymakers from considering other approaches to the conduct of policy. One idea that has gained considerable attention is price-level targeting. Under a price-level target, a central bank would adjust its policy instrument—typically a short-term interest rate—in an effort to achieve a pre-announced level of a particular price index over the medium term. In contrast, under an inflation target, a central bank tries to achieve a pre-announced rate of inflation—that is, the change in the price level—over the medium term. ; Kahn examines price-level targeting and discusses why policymakers may be reluctant to adopt such a strategy. Price-level targeting offers a number of potential benefits over inflation targeting. While inflation targets have helped stabilize inflation, the future level of prices remains uncertain. Price-level targets would by definition remove much of this uncertainty. Price-level targeting also has the advantage of potentially generating greater stability of both output and inflation. Particularly in the current low-inflation environment, where nominal policy rates have fallen near zero, price-level targeting may help support expectations of a positive inflation rate. These inflation expectations, in turn, would keep real interest rates negative, thereby stimulating interest-sensitive spending and contributing to economic recovery. ; Yet the benefits of price-level targeting may be relatively small and uncertain. In addition, this strategy is untested in practice (except for Sweden in the 1930s) and would present challenges for policymakers in communicating with the public regarding the objectives and direction of policy over the medium run. As a result, price level targeting will not likely be adopted by central bankers without considerable further research or a dramatic deterioration in economic performance that leads policymakers to fundamentally reconsider how they conduct monetary policy.
Volume (Year): (2009)
Issue (Month): Q III ()
|Contact details of provider:|| Postal: |
Phone: (816) 881-2254
Web page: http://www.kansascityfed.org
More information through EDIRC
|Order Information:|| Email: |
When requesting a correction, please mention this item's handle: RePEc:fip:fedker:y:2009:i:qiii:p:35-64:n:v.94no.3. 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: (LDayrit)
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.