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The case against price-level targeting

The case against price-level targeting Abstract As the Fed begins to wrestle with how to stimulate growth in the next economic downturn in an environment of low interest rates, a number of possible changes in its policy framework are being entertained. One in particular that has gained considerable support is price-level targeting, based on the view that this approach would tend to move inflation and nominal interest rates up late in the business cycle, yielding more room for rate cuts when the downturn ensues. We outline the inherent difficulties involved in controlling the level of inflation under the current inflation-targeting regime. We then argue that requiring the Fed to meet the more stringent objective of a price-level target could introduce significantly greater volatility into output growth—potentially worsening economic downturns—than is the case under the current policy framework. We also consider a preferred course of action that adds a bit more flexibility to the current framework, at least for the near to the medium term, and how the Fed might deal with the next recession. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Business Economics Springer Journals

The case against price-level targeting

Hooper, Peter
Business Economics , Volume 53 (3): 11 – Jul 1, 2018
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References (46)

Publisher
Springer Journals
Copyright
2018 National Association for Business Economics
ISSN
0007-666X
eISSN
1554-432X
DOI
10.1057/s11369-018-0081-5
Publisher site
See Article on Publisher Site

Abstract

Abstract As the Fed begins to wrestle with how to stimulate growth in the next economic downturn in an environment of low interest rates, a number of possible changes in its policy framework are being entertained. One in particular that has gained considerable support is price-level targeting, based on the view that this approach would tend to move inflation and nominal interest rates up late in the business cycle, yielding more room for rate cuts when the downturn ensues. We outline the inherent difficulties involved in controlling the level of inflation under the current inflation-targeting regime. We then argue that requiring the Fed to meet the more stringent objective of a price-level target could introduce significantly greater volatility into output growth—potentially worsening economic downturns—than is the case under the current policy framework. We also consider a preferred course of action that adds a bit more flexibility to the current framework, at least for the near to the medium term, and how the Fed might deal with the next recession.

Journal

Business Economics – Springer Journals

Published: Jul 1, 2018

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