Is Time Ripe for Price Level Path Stability?

Vítor Gaspar
Authors registered in the RePEc Author Service: Frank Rafael Smets and David Vestin

Working Papers from Banco de Portugal, Economics and Research Department

Abstract: In the paper, we provide a critical and selective survey of arguments relevant for the assessment of the case for price level path stability (PLPS). Using a standard hybrid new Keynesian model we argue that price level stability provides a natural framework for monetary policy under commitment. There are two main arguments in favour of a PLPS regime. First, it helps overall macroeconomic stability by making expectations operate like automatic stabilizers. Second, under a price level path stability regime, changes in the price level operates like an intertemporal adjustment mechanism, reducing the magnitude of required changes in nominal interest rates. Such a property is particularly relevant as a means to alleviate the importance of the zero bound on nominal interest rates. We also review and discuss the arguments against price level path stability. Finally, we also found, using the Smets and Wouters (2003) model which includes a wide variety of frictions and is estimated for the euro area, that the price level is stationary under optimal policy under commitment. The results obtain when the quasi-difference of inflation is used in the loss function, as in the hybrid new Keynesian model. Overall, the arguments in favour of or against price level path stability depend on the degree of dependence of private sector expectations on the characteristics of the monetary policy regime.Key words: Price Level Stability, Expectations, Adaptive Learning

JEL-codes: D83 E52 (search for similar items in EconPapers)
Date: 2007
References: View complete reference list from CitEc
Citations: View citations in EconPapers (60)

Downloads: (external link)
https://www.bportugal.pt/sites/default/files/anexos/papers/wp200719.pdf

Related works:
Working Paper: Is time ripe for price level path stability? (2007)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ptu:wpaper:w200719

Access Statistics for this paper

More papers in Working Papers from Banco de Portugal, Economics and Research Department Contact information at EDIRC.
Bibliographic data for series maintained by DEE-NTD ().