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Price-level uncertainty and inflation targeting

  • Robert Dittmar
  • William T. Gavin
  • Finn E. Kydland

In this paper, Dittmar, Gavin and Kydland make two points about commonly proposed rules for inflation targeting. First, they argue that there is a great deal of uncertainty about the price level and inflation inherent in current proposals to target inflation. They show that the degree to which the central bank cares about the real economy can have a large impact on price level (and inflation) uncertainty. They find that the magnitudes of uncertainty that prevailed across the G-10 throughout the last four decades are the expected consequence of commonly proposed inflation-targeting regimes. Second, they show that if central banks want both to stabilize business cycle fluctuations and to achieve price stability, then it may be useful to adopt a long-term objective for the price level.

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Article provided by Federal Reserve Bank of St. Louis in its journal Review.

Volume (Year): (1999)
Issue (Month): Jul ()
Pages: 23-34

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Handle: RePEc:fip:fedlrv:y:1999:i:jul:p:23-34:n:v.81no.4
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  1. Nathan S. Balke & Kenneth M. Emery, 1991. "The algebra of price stability," Research Paper 9117, Federal Reserve Bank of Dallas.
  2. Rudebusch, G.D. & Svensson, L.E.O., 1998. "Policy Rules for Inflation Targeting," Papers 637, Stockholm - International Economic Studies.
  3. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  4. Svensson, Lars E O, 1997. "Optimal Inflation Targets, "Conservative" Central Banks, and Linear Inflation Contracts," American Economic Review, American Economic Association, vol. 87(1), pages 98-114, March.
  5. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
  6. Pierre L. Siklos, 1999. "Inflation-target design: changing inflation performance and persistence in industrial countries," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 46-58.
  7. John C. Williams, 2003. "Simple rules for monetary policy," Economic Review, Federal Reserve Bank of San Francisco, pages 1-12.
  8. Robert Dittmar & William T. Gavin, 1999. "What do New-Keynesian Phillips Curves imply for price level targeting?," Working Papers 1999-021, Federal Reserve Bank of St. Louis.
  9. Brunner, Karl & Meltzer, Allan H., 1976. "The Phillips curve," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 1-18, January.
  10. Bennett T. McCallum, 1997. "Issues in the Design of Monetary Policy Rules," NBER Working Papers 6016, National Bureau of Economic Research, Inc.
  11. William T. Gavin & Finn E. Kydland, 1999. "Endogenous Money Supply and the Business Cycle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(2), pages 347-369, April.
  12. Bernanke, Ben S, 1995. "The Macroeconomics of the Great Depression: A Comparative Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(1), pages 1-28, February.
  13. Stephen G. Cecchetti, 1998. "Policy rules and targets: framing the central banker's problem," Economic Policy Review, Federal Reserve Bank of New York, issue Jun, pages 1-14.
  14. Michael T. Kiley, 1998. "Monetary policy under neoclassical and New-Keynesian Phillips Curves, with an application to price level and inflation targeting," Finance and Economics Discussion Series 1998-27, Board of Governors of the Federal Reserve System (U.S.).
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