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Price-level targeting versus inflation targeting in a new Keynesian model with inflation persistence

Author

Listed:
  • Luisa F. Acuña-Roa

    (Universidad de los Andes)

  • Julián A. Parra-Polania

    (Banco de la República)

Abstract

We compare Price-Level Targeting (PLT) versus Inflation Targeting (IT) using a New Keynesian model, which exhibits inflation persistence (as a result of partial indexation to lagged inflation). We find that, for standard values of the underlying parameters, (i) the loss associated to macroeconomic volatility may decrease about 29% by switching to PLT, (ii) a wide range of values for the weight given by the PLT central bank to output stabilisation allows to attain higher levels of social welfare, (iii) the higher the price rigidity the wider the range over which PLT outperforms IT, but the lower the welfare gain, and (iv) only when the level of indexation is higher than 65% it becomes better not to switch to PLT.

Suggested Citation

  • Luisa F. Acuña-Roa & Julián A. Parra-Polania, 2016. "Price-level targeting versus inflation targeting in a new Keynesian model with inflation persistence," Journal of Applied Economics, Universidad del CEMA, vol. 19, pages 249-270, November.
    • Handle: RePEc:cem:jaecon:v:19:y:2016:n:2:p:249-270
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    Cited by:

    1. Godday Uwawunkonye Ebuh & Afees Salisu & Victor Oboh & Nuruddeen Usman, 2023. "A test for the contributions of urban and rural inflation to inflation persistence in Nigeria," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 16(2), pages 222-246, May.
    2. Tule, Moses K. & Salisu, Afees A. & Ebuh, Godday U., 2020. "A test for inflation persistence in Nigeria using fractional integration & fractional cointegration techniques," Economic Modelling, Elsevier, vol. 87(C), pages 225-237.

    More about this item

    Keywords

    inflation targeting; price-level targeting; indexation; macroeconomic stability;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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