Price-Level Targeting and Stabilization Policy: A Review
This article reviews arguments in the literature for and against price-level targeting, focusing on its costs and benefits compared with inflation targeting. Benefits of price-level targeting include the effect on forward-looking inflation expectations; the ability to substitute for commitment by a central bank to its future policies; lessening forecast errors; better economic performance in response to real shocks because of lower wage indexation; and a reduction in the problem of the zero lower bound on nominal interest rates. Strict price-level targeting is not appropriate when inflation expectations are not fully forward-looking, and targeting the overall price level may be harmful if there are volatile movements in some of its components.
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Bank of Canada Review. - Bank of Canada. - Vol. 2009.2009, Spring, p. 21-31
Bank of Canada
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