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Price-Level versus Inflation Targeting in a Small Open Economy

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This paper compares two types of monetary policy: price-level targeting and inflation targeting. It reviews recent arguments that favour price-level targeting, and examines how certain factors, such as the nature of the shocks affecting the economy and the degree to which agents are forward-looking, bear upon the arguments. The paper then extends the analysis to a small open economy such as Canada's, and considers whether it is practical for this country to pursue price-level targets if its dominant trading partner, the United States, allows the price level to drift.

JEL Code(s): E, E5, E52