price-level target

Claire Jones

Many of the world’s most senior central bankers believe monetary policy is close to the limits of what it can responsibly do.

Others disagree.

One argument is that if central banks would only commit to higher inflation, then monetary policy would be more effective in boosting demand. Proponents fall into various camps: nominal GDP targeters, those who favour a price-level target, or those who want to raise existing inflation targets. 

Claire Jones

Harvard professor and famed textbook writer Greg Mankiw on Sunday argued the Federal Reserve should adopt a price-level target.

A price-level target aims for a certain level of inflation over the course of an economic cycle. In contrast, an inflation target has policymakers focus on a fixed point in the future.

Advocates argue price-level targeting is superior because of its flexibility. It allows for higher inflation when demand is anaemic with a view to reducing inflation below target once the economy recovers. As the Harvard professor notes, this would enable the Fed to reap the benefits that higher expected inflation would have in lowering interest rates without having to argue for the “political non-starter” of targeting inflation of, say, 4 per cent. 

Robin Harding

Dividing the FOMC up into hawks and doves is only marginally productive but inescapable at the moment. Dennis Lockhart is a moderate member of the committee, and representative of a number of colleagues with backgrounds in banking rather than economics. A speech he has given today suggests he is in favour of further QE barring a change in the data.

To opt for more quantitative easing at this juncture is a big decision. Today I will walk you through the thicket of considerations that lead me, at this moment, to be sympathetic to more monetary stimulus in the near future.


Robin Harding

Charles Evans, the president of the Chicago Fed, has restated his extreme concern about a liquidity trap and tried to set out a bit more about how a price-level target would work.

His main concern was to address some cases in which running a price-path target could be stressful for a central bank. Notably he mentioned:
- A slow pick up in inflation
- An economy running closer to capacity and hence turning more rapidly to inflation
- Accelerating inflation at the time when it came to close the gap

My objective today has been a simple one: to discuss a policy tool that has received almost zero discussion, though it regularly comes out of careful analyses of mainstream economic models that we use to assess monetary policy options. We should put this policy tool on the table and debate its suitability to the current situation in the U.S.