Price-Level Targeting

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In November 2006, the Bank of Canada announced its intention to lead a concerted research program over the next few years on the type of monetary policy framework that would best contribute to the economic well-being of Canadians in the decades ahead. The research will focus on two broad questions: whether economic welfare might be improved by targeting a rate of inflation lower than 2 per cent, and whether economic welfare might be improved by moving from an inflation-targeting (IT) framework to some form of price-level targeting (PLT). This paper focuses on the second question. The author provides an overview of the main conclusions in the literature on the relative merits of replacing IT with PLT, identifies some key outstanding questions, and outlines the Bank's research program. The author concludes that, compared with the conventional wisdom that prevailed a decade ago, recent analysis is more promising for PLT. Nevertheless, the models that have been used so far often ignore some of the key potential benefits, or some of the key potential costs, associated with PLT. More research is needed before one can draw strong conclusions.

JEL Code(s): E, E5, E52, E58