Price-Level Targeting and Stabilization Policy: A Review

Steve Ambler
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Steve Ambler: Bank of Canada, http://www.bankofcanada.ca/

Bank of Canada Review, 2009, vol. 2009, issue Spring, pages 21-31

Abstract: This article reviews arguments in the literature for and against price-level targeting, focusing on its costs and benefits compared with inflation targeting. Benefits of price-level targeting include the effect on forward-looking inflation expectations; the ability to substitute for commitment by a central bank to its future policies; lessening forecast errors; better economic performance in response to real shocks because of lower wage indexation; and a reduction in the problem of the zero lower bound on nominal interest rates. Strict price-level targeting is not appropriate when inflation expectations are not fully forward-looking, and targeting the overall price level may be harmful if there are volatile movements in some of its components.

Date: 2009

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