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Price-Level Targeting: an omelette that requires breaking some Inflation-Targeting eggs?

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  • Luisa F. Acuña Roa
  • Julian A. Parra Polania

Abstract

This manuscript can be divided into two main parts. The first one, using a simple example by Minford (2004) and Hatcher (2011), gives the reader a basic introduction to understand the comparison between two monetary-policy regimes: Inflation Targeting (IT) and Price-Level Targeting (PLT). The second part, using a model with a New Keynesian Phillips curve and a loss function (both of which incorporate partial indexation to lagged inflation), finds that for standard values of underlying parameters (i) the social loss associated to macroeconomic volatility may decrease about 26% by switching from IT to PLT and (ii) only when the initial level of indexation to lagged inflation is higher than 60% then it is better not to switch to PLT.

Suggested Citation

  • Luisa F. Acuña Roa & Julian A. Parra Polania, 2013. "Price-Level Targeting: an omelette that requires breaking some Inflation-Targeting eggs?," Borradores de Economia 783, Banco de la Republica de Colombia.
    • Handle: RePEc:bdr:borrec:783
    DOI: 10.32468/be.783
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    References listed on IDEAS

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    1. Sahuc, Jean-Guillaume, 2006. "Partial indexation, trend inflation, and the hybrid Phillips curve," Economics Letters, Elsevier, vol. 90(1), pages 42-50, January.
    2. Nessen, Marianne & Vestin, David, 2005. "Average Inflation Targeting," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(5), pages 837-863, October.
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    4. Gill Hammond, 2012. "State of the art of inflation targeting," Handbooks, Centre for Central Banking Studies, Bank of England, edition 4, number 29, April.
    5. Patrick Minford, 2004. "The A W Phillips memorial lecture to the New Zealand Association of Economists: Monetary Policy – should it move onto a price level target?," Macroeconomics 0409020, University Library of Munich, Germany.
    6. Jiri Bohm & Jan Filacek, 2012. "Price-Level Targeting–A Real Alternative to Inflation Targeting?," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 62(1), pages 2-26, February.
    7. 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.
    8. George A. Kahn, 2009. "Beyond inflation targeting: should central banks target the price level?," Economic Review, Federal Reserve Bank of Kansas City, vol. 94(Q III), pages 35-64.
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    10. Steve Ambler, 2009. "Price-Level Targeting and Stabilization Policy: A Review," Bank of Canada Review, Bank of Canada, vol. 2009(Spring), pages 21-31.
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    More about this item

    Keywords

    Inflation targeting; price-level targeting; indexation; macroeconomic stability;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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