Price-level targeting versus inflation targeting over the long-term

Book English OPEN
Hatcher, Michael ; Cardiff University (2011)
  • Publisher: Cardiff University
  • Subject: HB

This paper investigates the long-term impact of price-level targeting on social welfare in an overlapping generations model in which the young save for old age by investing in productive capital and indexed and nominal government bonds. A key feature of the model is that the extent of bond indexation is determined endogenously in response to monetary policy as part of an optimal commitment Ramsey policy. Due to the absence of base-level drift under price-level targeting, long-term inflation risk is reduced by an order of magnitude compared to inflation targeting. Consequently, real bond returns are stabilised somewhat, and consumption volatility for old generations is reduced by around 15 per cent. The baseline welfare gain from pricelevel targeting is equivalent to a permanent increase in aggregate consumption of only 0.01 per cent, but this estimate is strongly sensitive on the upside.
  • References (11)
    11 references, page 1 of 2

    Amano, R., Ambler, S. and P. Ireland (2007), Price-level targeting, indexation and welfare, working paper.

    Ambler, S. (2009), Price-level targeting and stabilisation policy: A survey, Journal of Economic Surveys, 23, 5, 974-997.

    Artus, P. (1995), Macro Economie (collection Economica Poche), Economica, Paris.

    Bank of Canada (2006), Renewal of the inflation-control target: Background information, Bank of Canada: Ottawa.

    Bank of Canada (2009), Bank of Canada Review, Spring 2009, Ottawa: Bank of Canada.

    Barro, R.J. (1974), Are government bonds net wealth? Journal of Political Economy 82, 1095-1117.

    Bordo, M..D., Dittmar, R.D. and Gavin, W.T. (2007), Gold, Fiat Money and Price Stability, B.E. Journal of Macroeconomics, Berkeley Electronic Press, 7(1).

    Börsch-Supan, A. (2000), Pension reform in Germany, World Economics 1, 81-101.

    Dittmar, R., Gavin, W.T. and Kydland, F.E. (1999), Price-level uncertainty and inflation targeting, Federal Reserve Bank of St. Louis Review, July/August 1999, 23- 33.

    Doepke, M. and Schnieder, M. (2006), Inflation and the redistribution of nominal wealth, Journal of Political Economy, 114, 1069-1097.

  • Metrics
    0
    views in OpenAIRE
    0
    views in local repository
    100
    downloads in local repository

    The information is available from the following content providers:

    From Number Of Views Number Of Downloads
    Online Research @ Cardiff - IRUS-UK 0 100
Share - Bookmark