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Price-level targeting when there is price-level drift

Author

Listed:
  • Gerberding, Christina
  • Gerke, Rafael
  • Hammermann, Felix
Abstract
Recent research has shown that optimal monetary policy may display considerable price-level drift. Proponents of price-level targeting have argued that the costs of eliminating the price-level drift may be reduced if the central bank responds flexibly by returning the price level only gradually to the target path (Gaspar et al., 2010). We revisit this argument in two variants of the New Keynesian model. We show that in a two-sector version of the model which allows for changes in relative prices across sectors, the costs of stabilisation under price-level targeting remain much higher than under inflation targeting for all policy-relevant horizons. Our conclusion is that extending the policy horizon is not a panacea to reduce the costs of eliminating pricelevel drift.

Suggested Citation

  • Gerberding, Christina & Gerke, Rafael & Hammermann, Felix, 2010. "Price-level targeting when there is price-level drift," Discussion Paper Series 1: Economic Studies 2010,23, Deutsche Bundesbank.
    • Handle: RePEc:zbw:bubdp1:201023
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    File URL: https://www.econstor.eu/bitstream/10419/43862/1/643806857.pdf
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    References listed on IDEAS

    as
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    Cited by:

    1. Axel A. Weber, 2011. "Challenges for monetary policy in the European Monetary Union," Review, Federal Reserve Bank of St. Louis, vol. 93(July), pages 235-242.
    2. Jiri Bohm & Jan Filacek, 2012. "Price-Level Targeting–A Real Alternative to Inflation Targeting?," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 62(1), pages 2-26, February.

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    More about this item

    Keywords

    price-level targeting; optimal monetary policy; commitment;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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