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Inflation Targeting and Price-Level-Path Targeting in the Global Economy Model: Some Open Economy Considerations

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  • Donald Coletti
  • René Lalonde
  • Dirk Muir

Abstract

This paper compares the capability of simple inflation targeting (IT) and price-level-path targeting (PLPT) rules to minimize inflation and output gap variability in a two-country, two-sector version of the Global Economy Model calibrated for Canada and the United States. We find that simple PLPT rules are slightly better than simple IT rules at macroeconomic stabilization and that the presence of terms-of-trade shocks tends to bolster the case for PLPT. Lastly, we demonstrate that the choice of monetary policy framework in the United States does not affect the relative merits of IT vs. PLPT in Canada. IMF Staff Papers (2008) 55, 326–338. doi:10.1057/imfsp.2008.2; published online 8 April 2008

Suggested Citation

  • Donald Coletti & René Lalonde & Dirk Muir, 2008. "Inflation Targeting and Price-Level-Path Targeting in the Global Economy Model: Some Open Economy Considerations," IMF Staff Papers, Palgrave Macmillan, vol. 55(2), pages 326-338, June.
    • Handle: RePEc:pal:imfstp:v:55:y:2008:i:2:p:326-338
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    Cited by:

    1. Coletti, Donald & Lalonde, René & Masson, Paul & Muir, Dirk & Snudden, Stephen, 2021. "Commodities and monetary policy: Implications for inflation and price level targeting," Journal of Policy Modeling, Elsevier, vol. 43(5), pages 982-999.
    2. René Lalonde & Dirk Muir, 2009. "BoC-GEM: Modelling the World Economy," Bank of Canada Review, Bank of Canada, vol. 2009(Summer), pages 43-53.
    3. Boris Cournède & Diego Moccero, 2009. "Is there a Case for Price-level Targeting?," OECD Economics Department Working Papers 721, OECD Publishing.
    4. Eagle, David M., 2012. "Nominal GDP targeting for a speedier economic recovery," MPRA Paper 39821, University Library of Munich, Germany.
    5. Hatcher, Michael C., 2011. "Comparing inflation and price-level targeting: A comprehensive review of the literature," Cardiff Economics Working Papers E2011/22, Cardiff University, Cardiff Business School, Economics Section.
    6. Sofía Bauducco & Rodrigo Caputo, 2010. "Price Level Targeting and Inflation Targeting: a Review," Working Papers Central Bank of Chile 601, Central Bank of Chile.
    7. Michael Hatcher & Patrick Minford, 2016. "Stabilisation Policy, Rational Expectations And Price-Level Versus Inflation Targeting: A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 30(2), pages 327-355, April.
    8. Nestor Azcona, 2018. "Can Price-Level Targeting Reduce Exchange Rate Volatility?," Eastern Economic Journal, Palgrave Macmillan;Eastern Economic Association, vol. 44(3), pages 400-436, June.
    9. José Dorich & Rhys R. Mendes & Yang Zhang, 2021. "The Bank of Canada’s “Horse Race” of Alternative Monetary Policy Frameworks: Some Interim Results from Model Simulations," Discussion Papers 2021-13, Bank of Canada.

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