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

Author

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

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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. Svensson, Lars E O, 1999. "Price-Level Targeting versus Inflation Targeting: A Free Lunch?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(3), pages 277-295, August.
    2. Sahuc, Jean-Guillaume, 2006. "Partial indexation, trend inflation, and the hybrid Phillips curve," Economics Letters, Elsevier, vol. 90(1), pages 42-50, January.
    3. 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.
    4. 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.
    5. Gill Hammond, 2012. "State of the art of inflation targeting," Handbooks, Centre for Central Banking Studies, Bank of England, edition 4, number 29, December.
    6. Steve Ambler, 2009. "Price-Level Targeting and Stabilization Policy: A Review," Bank of Canada Review, Bank of Canada, vol. 2009(Spring), pages 21-31.
    7. Nessen, Marianne & Vestin, David, 2005. "Average Inflation Targeting," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(5), pages 837-863, October.
    8. Christopher Ragan, 2011. "The Roads Not Taken: Why the Bank of Canada Stayed With Inflation Targeting," e-briefs 125, C.D. Howe Institute.
    9. 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.
    10. Gauti B. Eggertsson & Michael Woodford, 2003. "The Zero Bound on Interest Rates and Optimal Monetary Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 139-235.
    11. Gaspar, Vitor & Smets, Frank & Vestin, David, 2010. "Inflation Expectations, Adaptive Learning and Optimal Monetary Policy," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.),Handbook of Monetary Economics, edition 1, volume 3, chapter 19, pages 1055-1095, Elsevier.
    12. 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.
    13. Vestin, David, 2006. "Price-level versus inflation targeting," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1361-1376, October.
    14. Carl E. Walsh, 2011. "The Future of Inflation Targeting," The Economic Record, The Economic Society of Australia, vol. 87(s1), pages 23-36, September.
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    More about this item

    Keywords

    Inflation targeting; price-level targeting; indexation; macroeconomic stability;

    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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