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Adopting Price-Level Targeting under Imperfect Credibility in ToTEM

Gino Cateau, Oleksiy Kryvtsov (), Malik Shukayev () and Alexander Ueberfeldt

Staff Working Papers from Bank of Canada

Abstract: Using the Bank of Canada's main projection and policy-analysis model, ToTEM, this paper measures the welfare gains of switching from inflation targeting to price-level targeting under imperfect credibility. Following the policy change, private agents assign a probability to the event that the policy-maker will revert to inflation-targeting next period. As this probability decreases and imperfect credibility abates, inflation expectations in the economy become consistent with price-level targeting. The paper finds a large welfare gain when imperfect credibility is short-lived. The gain becomes smaller with persisting imperfect credibility, turning to a loss if it lasts more than 13 years.

Keywords: Monetary policy framework; Monetary policy implementation (search for similar items in EconPapers)
JEL-codes: E31 E52 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2009
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:09-17

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