The A W Phillips memorial lecture to the New Zealand Association of Economists: Monetary Policy – should it move onto a price level target?
We examine whether inflation targeting should be regarded as optimal. Targeting inflation implies (undesirably) that price level variance tends to infinity: we produce some evidence from both a representative agent model and a long-used forecasting model that, once an endogenous indexation response is allowed for, price level targeting imposes no extra costs of macro variability, indeed gives significant gains.
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