EconStor >
Bank of Canada, Ottawa >
Bank of Canada Working Papers >

Please use this identifier to cite or link to this item:

http://hdl.handle.net/10419/53897
  
Title:Price level versus inflation targeting under model uncertainty PDF Logo
Authors:Cateau, Gino
Issue Date:2008
Series/Report no.:Bank of Canada Working Paper 2008,15
Abstract:The purpose of this paper is to make a quantitative contribution to the inflation versus price level targeting debate. It considers a policy-maker that can set policy either through an inflation targeting rule or a price level targeting rule to minimize a quadratic loss function using the actual projection model of the Bank of Canada (ToTEM). The paper finds that price level targeting dominates inflation targeting, although it can lead to much more volatile inflation depending on the weight assigned to output gap stabilization in the loss function. The price level targeting rule is also found to mimic the full-commitment solution quite well. There is, however, an important difference: the full-commitment solution does not require stationarity in the price-level. The paper then analyzes the extent to which the results are sensitive to Hansen and Sargent (2004) model uncertainty. The paper finds the price level targeting rule to be robust; its performance deteriorates slower than the inflation targeting rule and the absolute decline in performance is small in magnitude.
Subjects:Uncertainty and monetary policy
JEL:E5
E58
D8
D81
Document Type:Working Paper
Appears in Collections:Bank of Canada Working Papers

Files in This Item:
File Description SizeFormat
56842025X.pdf328.47 kBAdobe PDF
No. of Downloads: Counter Stats
Download bibliographical data as: BibTeX
Share on:http://hdl.handle.net/10419/53897

Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.