The case against price-level targeting

Peter Hooper ()
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Peter Hooper: Deutsche Bank Securities, Inc

Business Economics, 2018, vol. 53, issue 3, No 6, 145-155

Abstract: Abstract As the Fed begins to wrestle with how to stimulate growth in the next economic downturn in an environment of low interest rates, a number of possible changes in its policy framework are being entertained. One in particular that has gained considerable support is price-level targeting, based on the view that this approach would tend to move inflation and nominal interest rates up late in the business cycle, yielding more room for rate cuts when the downturn ensues. We outline the inherent difficulties involved in controlling the level of inflation under the current inflation-targeting regime. We then argue that requiring the Fed to meet the more stringent objective of a price-level target could introduce significantly greater volatility into output growth—potentially worsening economic downturns—than is the case under the current policy framework. We also consider a preferred course of action that adds a bit more flexibility to the current framework, at least for the near to the medium term, and how the Fed might deal with the next recession.

Keywords: Fed; Monetary policy framework; Price-level targeting; Inflation targeting; r-Star; Recession (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1057/s11369-018-0081-5

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