Working Paper: CEPR ID: DP1510
Authors: Lars E. O. Svensson
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 acknowledged.
Keywords: price stability; inflation targets
JEL Codes: E42; E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| price-level targeting (E31) | lower inflation variability (E31) |
| inflation targeting (E31) | higher inflation variability (E31) |
| employment persistence (J63) | price-level targeting leads to lower inflation variability (E31) |
| price-level targeting (E31) | eliminates inflation bias under inflation targeting (E31) |