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Inflation Targeting and Price-Level-Path Targeting in the Global Economy Model: Some Open Economy Considerations

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  • Donald Coletti
  • René Lalonde
  • Dirk Muir

Abstract

This paper compares the capability of simple inflation targeting (IT) and price-level-path targeting (PLPT) rules to minimize inflation and output gap variability in a two-country, two-sector version of the Global Economy Model calibrated for Canada and the United States. We find that simple PLPT rules are slightly better than simple IT rules at macroeconomic stabilization and that the presence of terms-of-trade shocks tends to bolster the case for PLPT. Lastly, we demonstrate that the choice of monetary policy framework in the United States does not affect the relative merits of IT vs. PLPT in Canada. IMF Staff Papers (2008) 55, 326–338. doi:10.1057/imfsp.2008.2; published online 8 April 2008

Suggested Citation

  • Donald Coletti & René Lalonde & Dirk Muir, 2008. "Inflation Targeting and Price-Level-Path Targeting in the Global Economy Model: Some Open Economy Considerations," IMF Staff Papers, Palgrave Macmillan, vol. 55(2), pages 326-338, June.
  • Handle: RePEc:pal:imfstp:v:55:y:2008:i:2:p:326-338
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    Cited by:

    1. Hatcher, Michael C., 2011. "Comparing inflation and price-level targeting: A comprehensive review of the literature," Cardiff Economics Working Papers E2011/22, Cardiff University, Cardiff Business School, Economics Section.
    2. Michael Hatcher & Patrick Minford, 2016. "Stabilisation Policy, Rational Expectations And Price-Level Versus Inflation Targeting: A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 30(2), pages 327-355, April.
    3. Eagle, David M., 2012. "Nominal GDP targeting for a speedier economic recovery," MPRA Paper 39821, University Library of Munich, Germany.
    4. Hatcher, Michael & Minford, Patrick, 2014. "Stabilization policy, rational expectations and price-level versus infl‡ation targeting: a survey," CEPR Discussion Papers 9820, C.E.P.R. Discussion Papers.
    5. Boris Cournède & Diego Moccero, 2009. "Is there a Case for Price-level Targeting?," OECD Economics Department Working Papers 721, OECD Publishing.
    6. René Lalonde & Dirk Muir, 2009. "BoC-GEM: Modelling the World Economy," Bank of Canada Review, Bank of Canada, vol. 2009(Summer), pages 43-53.

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