PrefBlog

The Bank of Canada has released the Spring 2009 Review with the following feature articles:

• Next Steps for Canadian Monetary Policy
• Price-Level Targeting and Stabilization Policy: A Review
• Price-Level Uncertainty, Price-Level Targeting, and Nominal Debt Contracts
• Unexpected Inflation and Redistribution of Wealth in Canada

The concept of Price Level Targetting is explained in the first article:

Despite its recent successes in terms of macrostabilization, several authors have highlighted some shortcomings in the infl ation-targeting (IT) framework. Most notably, uncertainty on the price level grows with the planning horizon, since central banks with infl ation targets accommodate shocks to the price level, taking the post-shock level as given and aiming to stabilize infl ation from this level. In fact, the price level is unbounded at very distant horizons. Price-level targeting (PT) mitigates this uncertainty by committing central banks to restore the price level to a preannounced target following shocks. PT is frequently described as a departure from IT’s prescription for letting “bygones be bygones.”

Frankly, I didn’t find this issue particularly satisfying; there are necessarily many assumptions embedded in the papers. There is the prospect of lowering the term risk premium (flattening the yield curve) with Price Level Targetting, but on the other hand it’s asking rather a lot from the Central Bank, which will have to overcompensate for transient shocks rather than concentrating on getting things back to normal.

This entry was posted on Thursday, May 21st, 2009 at 11:39 am and is filed under Interesting External Papers. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.