Price stability through price-level targeting or inflation targeting? A tale of two experiments |
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Authors: | Alfred V. Guender Do Yoon Oh |
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Affiliation: | aDepartment of Economics, University of Canterbury, Private Bag 4800, Christchurch, New Zealand |
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Abstract: | Price stability can be attained through price-level or inflation targeting. This paper compares the two monetary policy strategies from both a historical and a theoretical perspective. The Swedish experiment with price-level targeting in the 1930 occurred within a framework that lacked the accountability characteristic of New Zealand's current policy framework for inflation-targeting. Using a simple forward-looking rational expectations framework, we show that price-level targeting offers a better output-inflation variability tradeoff than inflation targeting in the forward-looking New Keynesian framework. |
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Keywords: | Inflation targeting Price-level targeting Output-inflation Variability tradeoff Optimal policy |
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