Adopting Price-Level Targeting under Imperfect Credibility

Oleksiy Kryvtsov · Malik D. Shukayev · Alexander Ueberfeldt

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Monetary Policy and Economic Impact Economic Theory and Policy Economic theories and models

Abstract

Authors' note: After completing this working paper, we realized a computer coding error, which led to an overstatement of transition costs due to imperfect credibility. The corrected results show that it takes at least 10 quarters of low credibility (as opposed to 2 quarters in the old version) for a policy change from inflation targeting to price-level targeting to be welfare reducing. The revised version of this paper with corrected transition costs is forthcoming as a Bank of Canada Working Paper. 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 pricelevel targeting, if any, are small.

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References

1977Rules Rather than Discretion: The Inconsistency of Optimal Plans 2005INTEREST AND PRICES: FOUNDATIONS OF A THEORY OF MONETARY POLICY 1999The Science of Monetary Policy: A New Keynesian Perspective 2001Transparency and Credibility: Monetary Policy With Unobservable Goals 2004Technology Shocks in the New Keynesian Model 1990Modern Business Cycle Theory 2005Inflation Stabilization and Welfare: The Case of a Distorted Steady State 2006Discretionary monetary policy and the zero lower bound on nominal interest rates

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2021Adopting Price-Level Targeting under Imperfect Credibility in ToTEM 2009What is the Ideal Monetary Policy Regime? Improving the Bank of Canada's Inflation-targeting Program 2011Are bygones not bygones? Modeling price-level targeting with an escape clause and lessons from the gold standard 2012Price-level targeting rules and financial shocks: The case of Canada

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