Price Level Stability: Some Issues
Vitor Gaspar and
Frank Smets
National Institute Economic Review, 2000, vol. 174, 68-79
Abstract:
This article challenges the conventional wisdom that price level targeting necessarily increases the volatility of inflation and economic activity. It shows that the optimal policy under commitment for a society that cares only about the variability of output and inflation involves only a limited degree of base drift. The result crucially depends on the importance of forward-looking behaviour and on the credibility of the commitments. The case for price level targeting is strengthened when the possibility of a binding lower bound on nominal interest rates is considered. This may be increasingly relevant in a low inflation environment. This justifies renewed interest on price level targets in the context of thinking through how to prevent and respond to deflationary risks.
Date: 2000
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Persistent link: https://EconPapers.repec.org/RePEc:cup:nierev:v:174:y:2000:i::p:68-79_11
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