Should central banks switch from inflation to price-level targeting? quantifying the benefits from long-term price stability (original) (raw)
Economic researchers have not yet quantified the long-term benefits of price-level targeting. Consequently, central banks are unable to conduct a full cost-benefit analysis vis-a-vis inflation targeting. The primary contribution of this thesis is to quantify these benefits within a dynamic stochastic general equilibrium framework, thereby laying the foundations for a full cost-benefit analysis. The thesis focuses on three key areas: consumption volatility social welfare and inflation risk premia on long-term nominal contracts. Conventional wisdom holds that the main benefit of price-level targeting is a reduction in long-term inflation risk. However, the current workhorse model for monetary analysis cannot be used to evaluate this benefit, because long-term inflation risk does not affect agents' welfare. This thesis therefore builds and simulates overlapping generations models in which long-term inflation risk matters for social welfare. In these models, consumers save over a lo...
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