Is price level targeting really a

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Is price level targeting really a

I just deleted my previous comment. Do you mean that a supply shock would require an increase in NGDP growth rate relative to its past trend, or do you mean that the NGDP growth rate would have to be higher than what would be necessary to prevent the inflation?

I think it is obvious that a price level target requires a reduction in the growth path of NGDP in the face of a negative supply shock. On the other hand, when we anticipate an adverse supply shock, then the Fed would need to restrict NGDP growth to prevent it from causing an increase in the inflation rate.

Is price level targeting really a

And if we believe what members of the FOMC say, they seem to take what look to be current supply shocks, project them into the future, and take action to dampen them. Oil prices are heading up, that will cause more inflation, we have to prevent inflation expectations from being unachored… In my view, NGDP targeting, which I support, definitely implies that adverse supply shocks will cause a higher growth path for prices, and so inflation.

The particular rule I favor has no trend inflation, so the result is a higher price level, and inflation to get there. Firms raise prices and would like to sell the exact same output. This reduces the real quantity of money.

Is Price Level Targeting Really a Free Lunch: Essay – Free Papers and Essays Examples

Given the demand for money, there is an excess demand for money. Firms sell less and produce less and lower their prices from the intial level. The result is that the price level rises and real output falls in inverse proportion.

This story includes an excess demand for money.

Price Level Targeting

A central bank could avoid it by accomodating the increase in the price level. The price level would be unanchored. The reduction in real output is a reduction in real income. The demand for real money balances falls.

Given the quantity of money, there is an excess supply of money. The excess money is spent, so real expenditures rise. Firms raise their prices and perhaps produce more at the higher prices—more than the initially lower level of output. In the end, real output would be lower and the price level would be higher, in invers proportion.

This story involves an excess supply of money. The central bank could avoid it by decreases in the quantity of money, leaving the price level unchanged. Now, in the real world, supply shocks are specific.

And they generally result in higher prices and lower production for particular goods. By a matter of arithmetic, the price level is higher and aggregate real output is lower. The supply of wheat is lower.

The price of wheat is higher, and the quantity of wheat is lower. If nothing else in the entire economy changed, the price level is higher and aggregate output is lower.

If the demand for wheat were unit elastic, then NGDP would be unchanged. Expenditure on wheat is unchanged, and expenditures on everything else could be unchanged. Obviously, there are substitutes and complements in production and consumption, but this is the first pass.

If the demand for wheat is inelastic, the the price of wheat rises more than in proportion to the decrease in the quantity of wheat. Expenditures on wheat rise. Expenditures in the rest of the economy must fall if NGDP is to remain stable.

We have something like the excess demand for money described in the first scenario, with the generalized price hike.Jan 03,  · If price-level targeting is consistent with price stability and at the same time is superior to inflation targeting in terms of employment, it seems that it should be the hands-down favorite.

Price-level targeting does have some support at the Fed. But flexible price level targeting is really just a more ad-hoc, and therefore less robust, version of a nominal GDP level target.

Nominal GDP is the overall size of the economy uncorrected for. The Perverse Effects of Inflation or Price-Level Targeting Published August 23, Uncategorized 20 Comments I used to think that the most important objective for monetary policy was to stabilize the price level, and that it mattered less which particular price level was .

If price-level targeting is consistent with price stability and at the same time is superior to inflation targeting in terms of employment, it seems that it should be the hands-down favorite. If price-level targeting is consistent with price stability and at the same time is superior to inflation targeting in terms of employment, it seems that it should be the hands-down favorite.

Price-level targeting does have some support at the Fed. Williams at Brookings event. Central banks have less room to cut in the next crisis; Williams has spoken about his support for price-level targeting before.

EconoMonitor : Ed Dolan's Econ Blog » What Is Price-Level Targeting? Has Its Time Come?