Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/53961 
Year of Publication: 
2011
Series/Report no.: 
Bank of Canada Working Paper No. 2011-18
Publisher: 
Bank of Canada, Ottawa
Abstract: 
In this paper, we use an economics decision-making experiment to test a key assumption underpinning the efficacy of price-level targeting relative to inflation targeting for business cycle stabilization and mitigating the effects of the zero lower bound on nominal interest rates. In particular, we attempt to infer whether experimental participants understand the stationary nature of the price level under price-level targeting by observing their inflation forecasting behaviour in a laboratory setting. This is an important assumption since, without it, price-level targeting can lead to worse outcomes than inflation targeting. Our main result suggests that participants formulate inflation expectations consistent with the target-reverting nature of the price level but that they do not fully utilize it in their forecasts of future inflation.
Subjects: 
Monetary policy framework
JEL: 
E32
E52
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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