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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.

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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