Inflation Targeting versus Price-Level Targeting: Dynamic and Welfare Trade-Offs in a DSGE Model

Jan Ježek

Politická ekonomie, vol. preprint, No 1619

Abstract: This paper provides a transparent comparison of inflation targeting and price-level targeting within a standard New Keynesian DSGE framework. Using a calibrated model with nominal rigidities in prices and wages, the analysis examines the dynamic and welfare implications of strict and flexible variants of both policy regimes. Impulse response analysis reveals important asymmetries across shocks: price-level targeting facilitates adjustment following demand-side disturbances, while inflation targeting handles the output-inflation trade-off more effectively in the presence of cost-push shocks. Welfare comparisons indicate that price-level targeting yields slightly higher unconditional welfare on average, although differences across regimes are economically negligible. Overall, the results should be interpreted as consolidating existing DSGE evidence and providing a benchmark framework for understanding the conditions under which alternative monetary policy regimes perform differently.

Keywords: Inflation targeting; price-level targeting; DSGE models; monetary policy rules; welfare analysis (search for similar items in EconPapers)
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DOI: 10.18267/j.polek.1557

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