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Price Level Stability: Some Issues

Published online by Cambridge University Press:  26 March 2020

Vitor Gaspar and
Frank Smets
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Abstract

This article challenges the conventional wisdom that price level targeting necessarily increases the volatility of inflation and economic activity. It shows that the optimal policy under commitment for a society that cares only about the variability of output and inflation involves only a limited degree of base drift. The result crucially depends on the importance of forward-looking behaviour and on the credibility of the commitments. The case for price level targeting is strengthened when the possibility of a binding lower bound on nominal interest rates is considered. This may be increasingly relevant in a low inflation environment. This justifies renewed interest on price level targets in the context of thinking through how to prevent and respond to deflationary risks.

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Type
Research Article
Information
National Institute Economic Review , Volume 174 , October 2000, pp. 68 - 79
Copyright
Copyright © 2000 National Institute of Economic and Social Research

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