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Commodities and Monetary Policy: Implications for Inflation and Price Level Targeting

Donald Coletti, René Lalonde, Paul Masson (), Dirk Muir () and Stephen Snudden

Staff Working Papers from Bank of Canada

Abstract: We examine the relative ability of simple inflation targeting (IT) and price level targeting (PLT) monetary policy rules to minimize both inflation variability and business cycle fluctuations in Canada for shocks that have important consequences for global commodity prices. We find that commodities can play a key role in affecting the relative merits of the alternative monetary policy frameworks. In particular, large real adjustment costs in energy supply and demand induce highly persistent cost-push pressures in the economy leading to a significant deterioration in the inflation – output gap trade-off available to central banks, particularly to those pursuing price level targeting.

Keywords: Economic models; Inflation and prices; International topics; Monetary policy framework (search for similar items in EconPapers)
JEL-codes: E17 E31 E37 E52 F41 Q43 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-mon
Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:12-16

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