Hatcher, N. & Minford, P. (2014) “Inflation targeting vs price-level targeting: A new survey of theory and empirics“, VoxEU Organisation, 11 Μαΐου.
Inflation targeting and price-level targeting have excited economists for decades. This column reviews a survey on the merits of price-level targeting. The latter could potentially help monetary policy deal with the zero bound on nominal interest rates. Such beneficial effects depend on rational expectations and a New Keynesian structure of the economy.
Price stability is the key goal of almost every central bank in the world. But does that mean stable price levels or inflation rates? The main difference between inflation targeting and price-level targeting is the consequence of missing the target.
– Unanticipated shocks to inflation lead to corrective action when the price is the target.
– Under inflation targeting, past mistakes and shocks are treated as ‘bygones’.
If, for example, inflation is unexpectedly high today, this would be followed in the future by below average inflation under a price-level targeting regime. By contrast, inflation targeting aims for average (i.e. on-target) inflation in future years regardless of the level of current inflation (see Figure 1).
Σχετικές αναρτήσεις:
- Ballabriga, F. (2014) “Euro Zone Crisis: Diagnosis and Likely Solutions”, ESADEgeo Position Paper No. 35, Φεβρουάριος.
- Sinn, H. W. (2013) “Why Draghi was wrong to cut interest rates”, The Financial Times, 13 Νοεμβρίου.
- Mariniello, M. (2013) “Do European fines deter price fixing?”, VoxEU Organisation, 22 Σεπτεμβρίου.