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Price-level targeting when there is price-level drift

Christina Gerberding, Rafael Gerke and Felix Hammermann

No 2010,23, Discussion Paper Series 1: Economic Studies from Deutsche Bundesbank

Abstract: Recent research has shown that optimal monetary policy may display considerable price-level drift. Proponents of price-level targeting have argued that the costs of eliminating the price-level drift may be reduced if the central bank responds flexibly by returning the price level only gradually to the target path (Gaspar et al., 2010). We revisit this argument in two variants of the New Keynesian model. We show that in a two-sector version of the model which allows for changes in relative prices across sectors, the costs of stabilisation under price-level targeting remain much higher than under inflation targeting for all policy-relevant horizons. Our conclusion is that extending the policy horizon is not a panacea to reduce the costs of eliminating pricelevel drift.

Keywords: price-level targeting; optimal monetary policy; commitment (search for similar items in EconPapers)
JEL-codes: E31 E42 E58 (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdp1:201023

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