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Metrics Meta About a Metametric: The Consumer Price Level as a Flawed Target for Central Bank Policy

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  • Merijn Knibbe

Abstract

Inflation targeting is currently the policy of choice for central banks. This policy invariably targets consumer price inflation, which is only one of many available price level indices (such as prices of new investments and house prices). As there is no stable relationship between these price levels, and as differences in developments between the different price levels might induce destabilizing behavior, there is no reason why “low and stable” consumer price inflation should guarantee monetary and financial stability. Following John Maynard Keynes, a “low and stable” increase of average nominal wages might do a better job. As price levels are designed to estimate the purchasing power of spending power and as income, and spending power are used to not just consume or invest but also to pay down many kinds of (gross) debt, it is advisable to use a joint definition of monetary and financial stability, which combines stable purchasing power of monetary income with a stable ability of households and companies to pay off debts.

Suggested Citation

  • Merijn Knibbe, 2015. "Metrics Meta About a Metametric: The Consumer Price Level as a Flawed Target for Central Bank Policy," Journal of Economic Issues, Taylor & Francis Journals, vol. 49(2), pages 355-371, April.
    • Handle: RePEc:mes:jeciss:v:49:y:2015:i:2:p:355-371
    DOI: 10.1080/00213624.2015.1042733
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    Cited by:

    1. J.W. Mason & Arjun Jayadev, 2015. "Lost in Fiscal Space: Some Simple Analytics of Macroeconomic Policy in the Spirit of Tinbergen, Wicksell and Lerner," Working Papers 2015_05, University of Massachusetts Boston, Economics Department.

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