Price-level targeting and risk management in a low-inflation economy
No RWP 08-09, Research Working Paper from Federal Reserve Bank of Kansas City
With inflation and policy interest rates at historically low levels, policymakers show great concern about "downside tail risks" due to a zero lower bound on nominal interest rates. Low probability or tail events, such as sustained deflation or recession, are disruptive for the economy and can be difficult to resolve. This paper shows that price-level targeting mitigates downside tail risks respect to inflation targeting when policy is conducted through a simple interest-rate rule subject to a zero lower bound. Thus, price-level targeting is a more effective policy framework than inflation targeting for the management of downside tail risks in a low-inflation economy. At the same time, the average performance of the economy is not very different if policy implements price-level targeting instead of inflation targeting through a simple interest-rate rule. Price-level targeting may imply less variability of inflation than inflation targeting because policymakers can shape private-sector expectations about future inflation more effectively by targeting directly the price level path rather than inflation.
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations View citations in EconPapers (4) Track citations by RSS feed
Downloads: (external link)
Our link check indicates that this URL is bad, the error code is: 500 Can't connect to www.kansascityfed.org:443 (http://www.kansascityfed.org/PUBLICAT/RESWKPAP/PDF/RWP08-09.pdf [302 Redirect]--> https://www.kansascityfed.org/PUBLICAT/RESWKPAP/PDF/RWP08-09.pdf)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:fip:fedkrw:rwp08-09
Ordering information: This working paper can be ordered from
Access Statistics for this paper
More papers in Research Working Paper from Federal Reserve Bank of Kansas City Contact information at EDIRC.
Bibliographic data for series maintained by Lu Dayrit ().