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Price-Level Targeting and Inflation Expectations: Experimental Evidence

Robert Amano, Jim Engle-Warnick and Malik Shukayev ()

Staff Working Papers from Bank of Canada

Abstract: In this paper, we use an economics decision-making experiment to test a key assumption underpinning the efficacy of price-level targeting relative to inflation targeting for business cycle stabilization and mitigating the effects of the zero lower bound on nominal interest rates. In particular, we attempt to infer whether experimental participants understand the stationary nature of the price level under price-level targeting by observing their inflation forecasting behaviour in a laboratory setting. This is an important assumption since, without it, price-level targeting can lead to worse outcomes than inflation targeting. Our main result suggests that participants formulate inflation expectations consistent with the target-reverting nature of the price level but that they do not fully utilize it in their forecasts of future inflation.

Keywords: Monetary; policy; framework (search for similar items in EconPapers)
JEL-codes: E32 E52 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2011
New Economics Papers: this item is included in nep-cba, nep-exp, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16) Track citations by RSS feed

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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:11-18

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