Seminar Papers, Institute for International Economic Studies, Stockholm University
Lars E.O. Svensson
Price Level Targeting vs. Inflation Targeting: A Free Lunch?
Abstract: Price level targeting (without base drift) and inflation
targeting (with base drift) are compared under commitment and discretion,
with persistence in unemployment. Price level targeting is often said to
imply more short-run inflation variability and thereby more employment
variability than inflation targeting. Counter to this conventional wisdom,
under discretion a price level target results in lower inflation
variability than an inflation target (if unemployment is at least
moderately persistent). A price level target also eliminates the inflation
bias under discretion and, as is well known, reduces long-term price
variability. Society may be better off assigning a price level target to
the central bank even if its preferences correspond to inflation targeting.
A price level target thus appears to have more advantages than commonly
Keywords: Price stability; inflation targets; (follow links to similar papers)
JEL-Codes: E42; E52; E58; (follow links to similar papers)
29 pages, November 6, 1997
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