Using the Bank of Canada's main projection and policy-analysis model, ToTEM, this paper measures the welfare gains of switching from inflation targeting to price-level targeting under imperfect credibility. Following the policy change, private agents assign a probability to the event that the...

We construct a small-open-economy, New Keynesian dynamic stochastic generalequilibrium model with real-financial linkages to analyze the effects of financial shocks and macroprudential policies on the Canadian economy. Our model has four key features. First, it allows for non-trivial...

This paper proposes a simple analytical method to determine the stationarity of an unnormalized variable from the solution to a normalized model i.e. a model whose variables must be expressed in relative terms or must be differenced for a solution to exist. The paper then applies the methodto...

The purpose of this paper is to make a quantitative contribution to the inflation versus price level targeting debate. It considers a policy-maker that can set policy either through an inflation targeting rule or a price level targeting rule to minimize a quadratic loss function using the actual...

Like the gold standard, price level targeting (PT) involves not letting past deviations of inflation be bygones; both regimes return the price level (or price of gold) to its target. The experience of suspension of the gold standard in World War I, resumption in the 1920s (for some countries at...

A view advanced in the aftermath of the late-2000s financial crisis is that lower than optimal interest rates lead to excessive risk taking by financial intermediaries. We evaluate this view in a quantitative dynamic model in which interest rate policy affects risk taking by changing the amount...

This paper measures the welfare gains of switching from inflation-targeting to price-level targeting under imperfect credibility. Vestin (2006) shows that when the monetary authority cannot commit to future policy, price-level targeting yields higher welfare than inflation targeting. We revisit...

Various papers have suggested that Price-Level targeting is a welfare improving policy relative to Inflation targeting. From a practical standpoint, this raises an important yet unanswered question: What is the optimal price index to target? This paper derives the optimal price level targeting...

This paper examines the role of monetary policy in an environment with aggregate risk and incomplete markets. In a two-period overlapping-generations model with aggregate uncertainty and nominal bonds, optimal monetary policy attains the ex-ante Pareto optimal allocation. This policy aims to...

In this paper, we use an economics decision-making experiment to test a key assumption underpinning the efficacy of price-level targeting relative to inflation targeting for business cycle stabilization and mitigating the effects of the zero lower bound on nominal interest rates. In particular,...