No 106. Price-level targeting versus inflation targeting in a forward-looking model

by David Vestin

Abstract

This paper examines a price-level target in a model with a forward-looking Calvo-Taylor Phillips curve. Contrary to conventional wisdom, it is found that price-level targeting leads to a better trade-off between inflation and output-gap variability tha inflation targeting, when the central bank acts under discretion. In some cases, price-level targeting under discretion results in the same equilibrium as inflation targeting under commitment.