Inflation and Price Level Targeting in a New Keynesian Model.

In a New Keynesian macroeconomic model under credible commitment, price level targeting dominates inflation targeting. But with sufficient inflation aversion the inflation-targeting central bank can produce quantitatively similar results to one targeting the price level. The current degree of inflation aversion demonstrated by the Bank of England may be sufficient to reap the benefits of price level targeting. Copyright 2002 by Blackwell Publishers Ltd and The Victoria University of Manchester