Are Bygones Not Bygones? Modeling Price-Level Targeting with an Escape Clause and Lessons from the Gold Standard

Paul Masson and Malik Shukayev ()

Chapter 11 in Macroeconomic Modelling and Monetary and Exchange Rate Regimes, 2019, pp 385-417 from World Scientific Publishing Co. Pte. Ltd.

Abstract: Like the gold standard, price-level targeting (PT) involves not letting past deviations of inflation be bygones; both regimes return the price level (or price of gold) to its target. The experience of suspension of the gold standard in World War I and resumption in the 1920s (for some countries at a different parity) is reviewed. It suggests that, in practice, PT might operate with an escape clause that would allow rebasing of the price target in the face of large shocks. Using a calibrated general equilibrium model, we show that such an escape clause can produce multiple equilibria. For some parameterizations, there is a low credibility equilibrium (with high expectation of a reset) associated with high output volatility and frequent resets. These problems reduce, or reverse, the expectational advantage PT has over inflation targeting.

Keywords: Exchange Rates; Modelling; Monetary Unions; Inflation Targeting (search for similar items in EconPapers)
JEL-codes: F45 (search for similar items in EconPapers)
Date: 2019
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Related works:
Journal Article: Are bygones not bygones? Modeling price-level targeting with an escape clause and lessons from the gold standard (2011)
Working Paper: Are Bygones not Bygones? Modeling Price Level Targeting with an Escape Clause and Lessons from the Gold Standard (2008)
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