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Adopting Price-Level Targeting under Imperfect Credibility: An Update

Author

Listed:
  • Oleksiy Kryvtsov
  • Malik Shukayev
  • Alexander Ueberfeldt

Abstract

This paper measures the welfare gains of switching from inflation-targeting to price-level targeting under imperfect credibility. Vestin (2006) shows that when the monetary authority cannot commit to future policy, price-level targeting yields higher welfare than inflation targeting. We revisit this issue by introducing imperfect credibility, which is modeled as gradual adjustment of the private sector's beliefs about the policy change. We find that gains from switching to price-level targeting are small. A welfare loss occurs, if imperfect credibility is highly persistent.

Suggested Citation

  • Oleksiy Kryvtsov & Malik Shukayev & Alexander Ueberfeldt, 2008. "Adopting Price-Level Targeting under Imperfect Credibility: An Update," Staff Working Papers 08-37, Bank of Canada.
    • Handle: RePEc:bca:bocawp:08-37
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Sofía Bauducco & Rodrigo Caputo, 2010. "Price Level Targeting and Inflation Targeting: a Review," Working Papers Central Bank of Chile 601, Central Bank of Chile.
    2. Bodenstein, Martin & Hebden, James & Winkler, Fabian, 2022. "Learning and misperception of makeup strategies," Journal of Economic Dynamics and Control, Elsevier, vol. 139(C).
    3. Dr. Gregor Bäurle & Daniel Kaufmann, 2014. "Exchange rate and price dynamics in a small open economy - the role of the zero lower bound and monetary policy regimes," Working Papers 2014-10, Swiss National Bank.
    4. repec:zbw:bofrdp:2018_005 is not listed on IDEAS
    5. Martin Bodenstein & James Hebden & Fabian Winkler, 2019. "Learning and Misperception: Implications for Price-Level Targeting," Finance and Economics Discussion Series 2019-078, Board of Governors of the Federal Reserve System (U.S.).
    6. Hatcher, Michael, 2014. "Indexed versus nominal government debt under inflation and price-level targeting," Journal of Economic Dynamics and Control, Elsevier, vol. 45(C), pages 126-145.
    7. Carl E. Walsh, 2011. "The Future of Inflation Targeting," The Economic Record, The Economic Society of Australia, vol. 87(s1), pages 23-36, September.
    8. Sofía Bauducco B. & Rodrigo Caputo G, 2011. "Metas de Nivel de Precios y Metas de Inflación: Una Revisión de la Literatura," Notas de Investigación Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 14(1), pages 55-67, April.
    9. Honkapohja, Seppo & Mitra, Kaushik, 2020. "Price level targeting with evolving credibility," Journal of Monetary Economics, Elsevier, vol. 116(C), pages 88-103.
    10. Iulian Vasile Popescu, 2012. "Price-Level Targeting – A Viable Alternative To Inflation Targeting?," CES Working Papers, Centre for European Studies, Alexandru Ioan Cuza University, vol. 4(4), pages 809-823, December.
    11. Paul R. Masson & Malik D. Shukayev, 2019. "Are Bygones Not Bygones? Modeling Price-Level Targeting with an Escape Clause and Lessons from the Gold Standard," World Scientific Book Chapters, in: Macroeconomic Modelling and Monetary and Exchange Rate Regimes, chapter 11, pages 385-417, World Scientific Publishing Co. Pte. Ltd..
    12. Boris Cournède & Diego Moccero, 2009. "Is there a Case for Price-level Targeting?," OECD Economics Department Working Papers 721, OECD Publishing.
    13. Hatcher, Michael C., 2011. "Inflation versus price-level targeting and the zero lower bound: Stochastic simulations from the Smets-Wouters US model," Cardiff Economics Working Papers E2011/24, Cardiff University, Cardiff Business School, Economics Section.
    14. Honkapohja, Seppo & Mitra, Kaushik, 2020. "Price level targeting with evolving credibility," Journal of Monetary Economics, Elsevier, vol. 116(C), pages 88-103.
    15. Dib, Ali & Mendicino, Caterina & Zhang, Yahong, 2013. "Price-level targeting rules and financial shocks: The case of Canada," Economic Modelling, Elsevier, vol. 30(C), pages 941-953.
    16. repec:jes:wpaper:y:2012:v:4:p:809-823 is not listed on IDEAS
    17. 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.

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    More about this item

    Keywords

    Credibility; Monetary policy framework;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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