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Adopting Price-Level Targeting under Imperfect Credibility in ToTEM

  • Gino Cateau
  • Oleksiy Kryvtsov
  • Malik Shukayev
  • Alexander Ueberfeldt

Using the Bank of Canada's main projection and policy-analysis model, ToTEM, this paper measures the welfare gains of switching from inflation targeting to price-level targeting under imperfect credibility. Following the policy change, private agents assign a probability to the event that the policy-maker will revert to inflation-targeting next period. As this probability decreases and imperfect credibility abates, inflation expectations in the economy become consistent with price-level targeting. The paper finds a large welfare gain when imperfect credibility is short-lived. The gain becomes smaller with persisting imperfect credibility, turning to a loss if it lasts more than 13 years.

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Paper provided by Bank of Canada in its series Working Papers with number 09-17.

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Length: 34 pages
Date of creation: 2009
Date of revision:
Handle: RePEc:bca:bocawp:09-17
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