Price-level Targeting versus Inflation Targeting: A Free Lunch?

Lars Svensson

No 1510, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Price-level targeting (without base drift) and inflation targeting (with base drift) are compared under commitment and discretion, with persistence in unemployment. Price-level targeting is often said to imply more short-run inflation variability and thereby more employment variability than inflation targeting. Counter to this conventional wisdom, under discretion a price-level target results in lower inflation variability than an inflation target (if unemployment is at least moderately persistent). A price-level target also eliminates the inflation bias under discretion and, as is well known, reduces long-term price variability. Society may be better off assigning a price-level target to the central bank even if its preferences correspond to inflation targeting. A price-level target thus appears to have more advantages than commonly acknowledged.

Keywords: Inflation Targets; Price Stability (search for similar items in EconPapers)
JEL-codes: E42 E52 E58 (search for similar items in EconPapers)
Date: 1996-11
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Citations: View citations in EconPapers (22)

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Journal Article: Price-Level Targeting versus Inflation Targeting: A Free Lunch? (1999)
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