List of References
Akerlof, George, William Dickens and George Perry, 2000, “Near-Rational Wage and Price Setting and the Optimal Rates of Inflation and Unemployment,” Brookings Papers on Economic Activity, March.
Barnett, Richard and Merwan Engineer, 2000, “When is Price-Level Targeting a Good Idea?” Bank of Canada Conference on Price Stability and the Long-Run Target for Monetary Policy, June.
Beaudry, P. and M. Doyle, 2000, “What Happened to the Phillips Curve in the 1990s in Canada?” Working Paper, presented at the Bank of Canada Conference, June 8, 2000.
Crawford, Allan and Alan Harrison, 1997, “Testing for Downward Rigidity in Nominal Wage Rates,” Bank of Canada’s conference on Price Stability, Inflation Targets and Monetary Policy, May.
Dittmar R. and W. Gavin, 2000, “What do New-Keynesian Phillips Curves Imply for Price Level Targeting?” Federal Reserve Bank of St. Louis, March.
Farès, Jean and Thomas Lemieux, 2000, “Downward Nominal Wage Rigidity: A Critical Assessment and Some New Evidence for Canada,” Working Paper, presented at the Bank of Canada Conference, June 8, 2000.
Faruqui, Umar. A., 2000, “Employment Effects of Nominal Wage Rigidity: An Examination Using Wage-Settlement Data,” Bank of Canada Working Paper, July.
Feldstein, M., 1997, “Costs and Benefits of Going from Low Inflation to Price Stability,” in Romer, C. and D. Romer, eds., Reducing Inflation: 123–156, Chicago University Press.
Fischer, S., 1994, “Modern Central Banking,” in Capie, F. et al, The Future of Central Banking, Cambridge University Press, Cambridge, United Kingdom.
Fujiki, H., K. Okina and S. Shiratsuka, 2000, “Monetary Policy Under Zero Interest Rate,” IMES Discussion Paper Series 2000-E-11, May.
Jonung, L. and C. Berg, 1999, “Pioneering Price Level Targeting: The Swedish Experience 1931-1937” Journal of Monetary Economics, 43, 525–551.
Lucas, R. E. (1972) “Expectations and the Neutrality of Money,” Journal of Economic Theory 4 (April 1972): 103–124.
Maclean, Dinah and Hope Pioro, 2000, “Price Lever Targeting—The Role of Credibility” Working Paper presented at the Bank of Canada Conference June 8, 2000.
Masson P., M. Savastano and S. Sharma, 1997, “The Scope of Inflation Targeting in Developing Countries,” IMF Working Paper No. WP/97/130, October.
Mishkin, F., 1997, “The Causes and Propagation of Financial Instability: Lessons for Policymakers,” Maintaining Financial Stability in a Global Economy, Federal Reserve Bank of Kansas City, Kansas City, MO: 55–96.
Mishkin, Frederic S., 2000, “Issues in Inflation Targeting,” Bank of Canada Conference on Price Stability and the Long-Run Target for Monetary Policy, June.
Shiratsuka, S., 2000, “Is There a Desirable Rate of Inflation? A Theoretical and Empirical Survey,” IMES Discussion Paper No. 2000-E-32, October.
Summers, L. H. (1991) “How Should Long-Term Monetary Policy Be Determined?” Journal of Money, Credit and Banking, 23: 625–631.
Svensson, L.E.O., 1999, “Price-Level Targeting vs. Inflation Targeting: a Free Lunch,” Journal of Money, Credit and Banking (31): 277–295.
Thiessen, Gordon G., 1998, “The Canadian Experience with Targets for Inflation Control,” The Gibson Lecture, Queen’s University, Ontario, October.
Thiessen, Gordon G., “Does Canada Need More Inflation to Grease the Wheels of the Economy?” Bank of Canada Review, Winter 1996-97.
Walsh, Carl E., 2000, “Should Central Banks Stabilize Prices?” Federal Bank of San Francisco, Economic Letter, No. 24, Research Department, August 11.
Prepared by Martin Kaufman and Rodolfo Luzio.
Sarel (1995) shows using panel data that there is a nonlinear effect of inflation on economic growth. When inflation is below a certain threshold, its effect on growth is null or slightly positive, while higher inflation has a negative, significant, and robust effect on growth. This is sometimes referred to in the economic literature as the “grease” versus “sand” effects of inflation.
Wage freezes alone are an incomplete test for downward rigidity because freezes can result from other sources, such as menu costs associated with changing wages and a lower variance of wage changes induced by a reduction in inflation uncertainty.
The composition effect refers to the changes in the composition of the workforce. This effect can bias up aggregate wage changes since rigidity only affects workers that stay with the same employer.
In practice, however, these hybrid alternatives may be very difficult to implement due, in part, to problems in trying to clearly explain the regime and to potentially less predictability in how the correction of deviations in inflation would be done.
Under price level targeting, the commitment to revert deviations of the the price level away from the target would determine that any unexpected increase in real debt burdens would be temporary. However, debtors do suffer a loss, and the target-reversion process can be protracted exhacerbating liquidity problems.
Financial contracts such as indexed bonds, price-level contingent debt contracts, and option contracts efficiently reduce the cost associated with price uncertainty in the long run. See Fischer (1994).
See Summers (1991). This argument assumes that changes in short-term nominal interest rates affect real interest rates at least in the short run.
See Dittmar and Gavin (2000). The basic intuition is that given adjustment costs, forward-looking agents incorporate the effect of expected future price changes into current decisions. For instance, when prices are costly to change, firms raise current prices in response to an anticipated future aggregate demand expansion, thus affecting the current output level.
Intuitively, the time-consistency problem arises when the monetary authority can use current policy announcements to influence public expectations, but then deviate from their announced policy path in order to reap the benefits from such deviation.
See Akerlof et al. (2000). Federal Reserve Chairman Alan Greenspan has defined price stability as the level of inflation at which price changes no longer play a significant role in economic decision making, suggesting that price stability essentially may be associated with some low, positive inflation rate.
Sweden implemented price-level targeting from 1931 to 1937 (see Berg and Jonung (1999)). The Swedish price stabilization program resulted from the suspension of the international gold standard in 1931 and was viewed as a temporary solution before a return to the gold standard. Its initial goal was to arrest the ongoing deflation and “maintain the domestic purchasing power of the Swedish krona” (Jonung and Berg (1999), p. 535). In 1937, employment stabilization became the primary objective of Swedish policy authorities; the implementation of active countercyclical fiscal policies marked the end of the price level stabilization program.