Careful Price Level Targeting

Abstract

This chapter examines a class of interest rate rules that respond to public expectations and to lagged variables. Varying levels of commitment correspond to varying degrees of response to lagged output and targeting of the price level. If the response rises (unintentionally) above the optimal level, the outcome deteriorates severely. Hence, the optimal level of commitment is sensitive to the method of expectations formation and partial commitment is the robust, optimal policy. The policymaker should adjust the price level toward a target, but complete adjustment is neither necessary nor desirable.

Citation

Waters, G.A. (2015), "Careful Price Level Targeting", Monetary Policy in the Context of the Financial Crisis: New Challenges and Lessons (International Symposia in Economic Theory and Econometrics, Vol. 24), Emerald Group Publishing Limited, Leeds, pp. 29-40. https://doi.org/10.1108/S1571-038620150000024014