Price and Output Stability Under Price Level Targeting

University of Alabama, Economics, Finance and Legal Studies Working Paper No. 01-05-01

26 Pages Posted: 8 Jun 2001

See all articles by James Peery Cover

James Peery Cover

University of Alabama - Department of Economics, Finance and Legal Studies

Paul Pecorino

University of Alabama - Department of Economics, Finance and Legal Studies

Date Written: May 2001

Abstract

It is commonly believed that a monetary policy that targets the price level reduces the long-term variability of the price level but only at the cost of increased variability in both inflation and output. This paper shows that this result may not hold so long as increases in the real rate of interest cause decreases in aggregate demand. In particular it is shown that the one-step-ahead variance of output and inflation are lower under price-level targeting than under inflation targeting. Further, it is shown that the variance of inflation about its target value can be lower under price-level targeting than under inflation targeting. This increased stability under price level targeting works through an interest rate channel not previously identified in the literature on price-level and inflation targeting.

Keywords: price level targeting, inflation targeting, price stability, output stability, monetary policy

JEL Classification: E3, E4, E5

Suggested Citation

Cover, James Peery and Pecorino, Paul, Price and Output Stability Under Price Level Targeting (May 2001). University of Alabama, Economics, Finance and Legal Studies Working Paper No. 01-05-01, Available at SSRN: https://ssrn.com/abstract=271581 or http://dx.doi.org/10.2139/ssrn.271581

James Peery Cover (Contact Author)

University of Alabama - Department of Economics, Finance and Legal Studies ( email )

P.O. Box 870244
Tuscaloosa, AL 35487
United States
205-348-8977 (Phone)
205-348-0590 (Fax)

Paul Pecorino

University of Alabama - Department of Economics, Finance and Legal Studies ( email )

P.O. Box 870244
Tuscaloosa, AL 35487
United States
205-348-0379 (Phone)
205-348-0590 (Fax)

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
91
Abstract Views
1,102
rank
321,763
PlumX Metrics