Price Level Targeting vs. Inflation Targeting: A Free Lunch?

Lars Svensson

No 5719, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Price level targeting (without base drift) and inflation targeting (with base drift) are compared under commitment and discretion, with persistence in unemployment. Price level targeting is often said to imply more short-run inflation variability and thereby more employment variability than inflation targeting. Counter to this conventional wisdom, under discretion a price level target results in lower inflation variability than an inflation target (if unemployment is at least moderately persistent). A price level target also eliminates the inflation bias under discretion and, as is well known, reduces long-term price variability. Society may be better off assigning a price level target to the central bank even if its preferences correspond to inflation targeting. A price level target thus appears to have more advantages than commonly acknowledged.

JEL-codes: D42 E58 (search for similar items in EconPapers)
Date: 1996-08
Note: IFM ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (20)

Published as Journal of Money, Credit and Banking, Vol. 31 (1999): 277-295.

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Related works:
Working Paper: Price Level Targeting vs. Inflation Targeting: A Free Lunch? (1997)
Working Paper: Price Level Targeting vs Inflation Targeting: A free Lunch? (1996)
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