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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 policy-maker will revert to inflation-targeting next period. As this probability decreases and imperfect credibility abates, inflation expectations in the economy become consistent with price-level targeting. The paper finds a large welfare gain when imperfect credibility is short-lived. The gain becomes smaller with persisting imperfect credibility, turning to a loss if it lasts more than 13 years.

This paper investigates hybrid inflation-price-level targeting (HT), employing a Phillips curve with output persistence. By HT we mean that a central bank targets a weighted average of the optimal inflation rate & its corresponding price level. The analysis shows that if output is persistent to some extent, it is desirable to adopt HT because, relative to the case of alternative regimes such as inflation targeting (IT) & price-level targeting (PT), it will reduce the variability of inflation & thereby social loss. In addition, it is shown that the optimal hybrid-type target is uniquely determined according to the degree of persistence in output. 4 Figures, 1 Appendix, 26 References. Adapted from the source document.

Inflation‐targeting monetary policy is compared with price‐level targeting. It is argued that price‐level targeting offers greater certainty about the long‐term inflation rate, greater economic growth, a superior response to a deflationary depression, and other advantages.

AbstractThis paper investigates hybrid inflation‐price‐level targeting (HT), employing a Phillips curve with output persistence. By HT we mean that a central bank targets a weighted average of the optimal inflation rate and its corresponding price level. The analysis shows that if output is persistent to some extent, it is desirable to adopt HT because, relative to the case of alternative regimes such as inflation targeting (IT) and price‐level targeting (PT), it will reduce the variability of inflation and thereby social loss. In addition, it is shown that the optimal hybrid‐type target is uniquely determined according to the degree of persistence in output.

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.

Low nominal interest rates, low inflation, and slow economic growth pose challenges to central bankers. In particular, with estimates of the long-run equilibrium level of the real interest rate quite low, the next recession may occur at a time when the Fed has little room to cut short-term rates. As I have written previously and…

Despite a long and sustained recovery from the Great Recession, a number of factors—including an aging population, slow productivity growth, and subdued inflation—continue to exert downward pressure on U.S. interest rates. It seems likely that even when monetary policy is at a neutral setting, neither restraining nor stimulating the economy, interest rates will remain significantly…

We examine whether inflation targeting should be regarded as optimal. Targeting inflation implies (undesirably) that price level variance tends to infinity: we produce some evidence from both a representative agent model & a long-used forecasting model that, once an endogenous indexation response is allowed for, price level targeting imposes no extra costs of macro variability, indeed gives significant gains. 2 Tables, 1 Figure, 43 References. Adapted from the source document.

AbstractWe examine whether inflation targeting should be regarded as optimal. Targeting inflation implies (undesirably) that price level variance tends to infinity: we produce some evidence from both a representative agent model and a long‐used forecasting model that, once an endogenous indexation response is allowed for, price level targeting imposes no extra costs of macro variability, indeed gives significant gains.