The inflation-output variability tradeoff and price-level targets

Robert Dittmar, William Gavin () and Finn Kydland

Review, 1999, issue Jan, No 1, 23-32

Abstract: In this article, the authors describe a popular monetary policy framework based on a neoclassical Phillips Curve model. Here, the choice between an inflation target and a price-level target depends on characteristics of real output. If the output gap is relatively persistent, then targeting the price level results in a better set of policy options for the central bank. The authors present evidence from the G-10 countries showing that conventionally measured output gaps are highly persistent. The policy implication of assuming rational expectations and this Phillips Curve model is that central banks should set objectives for a price level, not an inflation rate.

Keywords: Inflation (Finance); Monetary policy; Phillips curve (search for similar items in EconPapers)
Date: 1999
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Citations: View citations in EconPapers (29)

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