Price-Level Targeting versus Inflation Targeting: A Free Lunch?
Price level targeting (without base drift) and inflation targeting (with base drift) are compared with persistence in output (generated by sticky prices, for instance). Counter to conventional wisdom, price level targeting results in lower short-run inflation variability than inflation targeting (if output is at least moderately persistent). Price level targeting also eliminates any average inflation bias. Even if the preferences of society correspond to inflation targeting, it may nevertheless prefer to assign price level targeting to the central bank. Price level targeting thus appears to have more advantages than what is commonly acknowledged.
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Volume (Year): 31 (1999)
Issue (Month): 3 (August)
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