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Title: Price-level Targeting versus Inflation Targeting: A Free Lunch?

Author(s): Lars E.O. Svensson

Publication Date: November 1996

Keyword(s): Inflation Targets and Price Stability

Programme Area(s): International Macroeconomics

Abstract: Price-level targeting (without base drift) and inflation targeting (with base drift) are compared under commitment and discretion, with persistence in unemployment. Price-level targeting is often said to imply more short-run inflation variability and thereby more employment variability than inflation targeting. Counter to this conventional wisdom, under discretion a price-level target results in lower inflation variability than an inflation target (if unemployment is at least moderately persistent). A price-level target also eliminates the inflation bias under discretion and, as is well known, reduces long-term price variability. Society may be better off assigning a price-level target to the central bank even if its preferences correspond to inflation targeting. A price-level target thus appears to have more advantages than commonly acknowledged.

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Bibliographic Reference

Svensson, L. 1996. 'Price-level Targeting versus Inflation Targeting: A Free Lunch?'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=1510