Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/53927
Authors: 
Masson, Paul R.
Shukayev, Malik D.
Year of Publication: 
2008
Series/Report no.: 
Bank of Canada Working Paper 2008,27
Abstract: 
Like the gold standard, price level targeting (PT) involves not letting past deviations of inflation be bygones; both regimes return the price level (or price of gold) to its target. The experience of suspension of the gold standard in World War I, resumption in the 1920s (for some countries at a different parity), and final abandonment is reviewed. It suggests that PT would likely operate with an escape clause that allowed rebasing of the price target in the face of large output declines. Using a calibrated general equilibrium model, we show that such an escape clause can produce multiple equilibria. For some parameterizations, there is a low credibility equilibrium (with high expectation of a reset) associated with high output volatility and frequent resets. These problems reduce the expectational advantage of PT over inflation targeting.
Subjects: 
Credibility
Monetary policy framework
JEL: 
E31
E52
Document Type: 
Working Paper

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