Price-Level Targeting versus Inflation Targeting: A Free Lunch?

Price-level targeting (without base drift) and inflation targeting (with base drift) are compared with persistence in output (generated by sticky prices, for instance). Counter to conventional wisdom, price-level targeting results in lower short-run inflation variability than inflation targeting (if...

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Bibliographic Details
Published in:Journal of money, credit and banking credit and banking, 1999-08, Vol.31 (3), p.277-295
Main Author: Svensson, Lars E. O.
Format: Article
Language:English
Subjects:
Advantages
Analysis
Bank credit
Bias
Central banks
Comparative analysis
Economic theory
Federal Reserve Bank
Inflation
Inflation (Economics)
Inflation (Finance)
Inflation accounting
Inflation controls
Inflation rates
Inflation targeting
Labor unions
Monetary policy
Output gaps
Output rate
Phillips curve
Price level
Price levels
Price stability
Pricing
Product price
Sticky prices
Studies
Supply shocks
Union membership
Volatility
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Description
Summary:Price-level targeting (without base drift) and inflation targeting (with base drift) are compared with persistence in output (generated by sticky prices, for instance). Counter to conventional wisdom, price-level targeting results in lower short-run inflation variability than inflation targeting (if output is at least moderately persistent). Price-level targeting also eliminates any average inflation bias. Even if the preferences of society correspond to inflation targeting, it may nevertheless prefer to assign price-level targeting to the central bank. Price-level targeting thus appears to have more advantages than those commonly acknowledged.
ISSN:0022-2879
1538-4616
DOI:10.2307/2601112