Price‐level versus inflation targeting under model uncertainty

Monetary policy should be guided by macroeconomic models with limited nominal rigidity; ‘New Classical’ or even for some issues just plain Classical (i.e. with no nominal rigidity at all) models are perfectly adequate for understanding various aspects of the economy that have previously led economists to believe in a high degree of nominal rigidity. On UK data these models account for the facts of inflation persistence and exchange rate ‘overshooting’; their impulse responses are in line with the data; and a typical example, the Liverpool Model, is marginally accepted in its entirety by the data since 1979. Such models suggest that no increased macro instability would result from taking the rigours of monetary policy one stage further from inflation targeting and ensuring that the price level itself is returned to its long-run preset target path — so that the value of money over long periods of time would be utterly predictable.

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An Evaluation of Monetary Targeting Regimes

National Institute Economic Review ◽

10.1177/002795010017400114 ◽

2000 ◽

Vol 174 ◽

pp. 105-113 ◽

Cited By ~ 17

Author(s):

Ray Barrell ◽

Karen Dury

Keyword(s):

Monetary Policy ◽

Inflation Targeting ◽

Price Level ◽

Policy Framework ◽

Policy Regime ◽

Feedback Mechanisms ◽

Policy Regimes ◽

Monetary Targeting ◽

Over Time ◽

Monetary Policy Framework

The policy regime in Europe has put the economy on ‘auto-pilot’. We investigate different designs for the required feedback mechanisms. The uncertainty facing an economy depends on the pattern of shocks it faces, the response of the private sector to those shocks and also the policy reactions of the authorities. Two ‘ideal type’ policy regimes are investigated, and inflation targeting is compared to nominal aggregate targeting. In general it is suggested that targeting a nominal aggregate reduces the variability of the price level, and stabilises the price level more quickly over time. Inflation outcomes are also less variable for the Euro Area, and they are less asymmetric when a nominal aggregate is targeted. The new European fiscal framework requires that countries set deficit targets close to balance. We show that there is plenty of space for automatic stabilisers to work, but the room available depends in part on the monetary policy framework chosen.

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"Does Inflation Targeting Framework Make a Significant Difference in Lowering Price Level?” What is Its Implication to Indonesia’s Inflation Rate?

Economics and Finance in Indonesia ◽

10.7454/efi.v61i2.508 ◽

2015 ◽

Vol 61 (2) ◽

pp. 131

Author(s):

Faisal Rachman

Keyword(s):

Monetary Policy ◽

Inflation Targeting ◽

Inflation Rate ◽

Price Level ◽

Structural Break ◽

Policy Framework ◽

Difference In Difference ◽

Public Expectation ◽

Significant Difference ◽

Monetary Policy Framework

AbstractIn the last two decades many countries have been starting to employ Inflation Targeting Framework (ITF) as their main monetary policy framework. This is done to achieve an objective of anchoring public expectation on inflation which in the end will steer the price level movement towards ITF’s ultimate target of relatively low and stable inflation rate. By conducting Difference-in-Difference method on panel data consisting of five countries implementing ITF since 2001 and twenty-one selected non-ITF countries for period 1990-2010, it is statistically proved that ITF adoption has a significant effect on inflation. In case of Indonesia, through Structural Break approach, the implementation of ITF since 2005 is also proved able to lower and stabilize inflation rate.Abstrak Dalam dua dekade terakhir ini banyak negara yang telah mulai menggunakan Inflation Targeting Framework (ITF) sebagai kerangka utama kebijakan moneter mereka. Hal ini dilakukan guna mencapai tujuan pengendalian ekspektasi publik yang pada akhirnya akan mengendalikan pergerakan tingkat harga relatif rendah and stabil. Dengan menggunakan metode Difference-in-Difference pada data panel, yang terdiri dari lima negara yang telah mengimplementasikan ITF sejak tahun 2001 dan dua puluh satu negara bukan pengguna ITF, untuk periode 1990-2010, disimpulkan bahwa ITF memiliki dampak signifikan pada tingkat inflasi. Untuk kasus Indonesia yang telah mengimplementasikan ITF sejak tahun 2005, melalui metode Structural Break disimpulkan hasil yang sama, yaitu tingkatan harga yang rendah dan stabil.

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Friedman Meets Hayek on Money and Prices in Canada

Review of Economic Analysis ◽

10.15353/rea.v8i1.1432 ◽

2016 ◽

Vol 8 (1) ◽

pp. 69-96

Author(s):

Kam Hon Chu

Keyword(s):

Inflation Targeting ◽

Price Level ◽

Relative Price ◽

Price Stability ◽

Business Cycle Theory ◽

Relative Prices ◽

General Price Level ◽

Price Indexes ◽

Monetary Shock ◽

The Impact

Though both classical liberals, Friedman adopted the quantity theory of money and used the general price indexes and aggregate data in empirical analysis, whereas Hayek rejected aggregative analyses as potentially misleading and focused on the impact of money on relative prices in his business cycle theory. This study shows theoretically that when the central bank minimizes the monetary shock to maintain stability in the general price level, it also maintains simultaneously relative price stability, thus narrowing the divergence between Friedman and Hayek. This finding is empirically verified by Canada’s experience with inflation targeting since 1991

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Interactions among Economic Ideas, Policies and Experience - The Establishment of Inflation Targeting in Canada, 1991-2001

Review of Economic Analysis ◽

10.15353/rea.v12i2.1693 ◽

2020 ◽

Vol 12 (2) ◽

pp. 133-165

Author(s):

David Laidler

Keyword(s):

Monetary Policy ◽

Inflation Targeting ◽

Inflation Rate ◽

Price Level ◽

Flexible Exchange Rate ◽

Money Growth ◽

Policy Regime ◽

Domestic Prices ◽

The Stability

In Canada, targeting the inflation rate was intended as a temporary measure during a transition to price-level stability, but became a well-established monetary policy regime in its own right. This paper analyses the role of the interaction of economic ideas with the experience generated by their application to policy in bringing about this outcome. In the following account, changing beliefs about the stability or otherwise of ongoing inflation, the capacity of a flexible exchange rate to create a vicious circle of depreciation and rising domestic prices, are emphasised, while ideas about the natural unemployment rate and money growth in influencing economic outcomes are also discussed. Today’s standard theoretical approach to modelling inflation targeting arrived on the scene only as the Canadian regime was becoming well established.

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