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Book contents
- Frontmatter
- Contents
- List of Tables, Figures, and Appendices
- List of Contributors
- Preface
- 1 The State of Play in Central Banking and the Challenges to Come
- PART I PAST, PRESENT, AND FUTURE IN THE CONDUCT OF MONETARY POLICY
- 2 Is the Time Ripe for Price-Level Path Stability?
- 3 The Principal-Agent Approach to Monetary Policy Delegation
- 4 Implementing Monetary Policy in the 2000s: Operating Procedures in Asia and Beyond
- PART II THE SCOPE OF CENTRAL BANKING OPERATIONS AND CENTRAL BANK INDEPENDENCE
- PART III TRANSPARENCY AND GOVERNANCE IN CENTRAL BANKING
- Index
2 - Is the Time Ripe for Price-Level Path Stability?
Published online by Cambridge University Press: 06 December 2010
- Frontmatter
- Contents
- List of Tables, Figures, and Appendices
- List of Contributors
- Preface
- 1 The State of Play in Central Banking and the Challenges to Come
- PART I PAST, PRESENT, AND FUTURE IN THE CONDUCT OF MONETARY POLICY
- 2 Is the Time Ripe for Price-Level Path Stability?
- 3 The Principal-Agent Approach to Monetary Policy Delegation
- 4 Implementing Monetary Policy in the 2000s: Operating Procedures in Asia and Beyond
- PART II THE SCOPE OF CENTRAL BANKING OPERATIONS AND CENTRAL BANK INDEPENDENCE
- PART III TRANSPARENCY AND GOVERNANCE IN CENTRAL BANKING
- Index
Summary
Abstract
In this chapter we provide a critical and selective survey of arguments relevant for the assessment of the case for price-level path stability (PLPS). Using a standard, hybrid new Keynesian model, we argue that price-level stability provides a natural framework for monetary policy under commitment. There are two main arguments in favor of a PLPS regime. First, it helps overall macroeconomic stability by making expectations operate like automatic stabilizers. Second, under a PLPS regime, changes in the price level operate like an intertemporal adjustment mechanism, reducing the magnitude of required changes in nominal interest rates. Such a property is particularly relevant as a means to alleviate the importance of the zero bound on nominal interest rates. We also review and discuss the arguments against PLPS. Finally, we also demonstrate, using the Smets and Wouters (2003) model that includes a wide variety of frictions and is estimated for the euro area, that the price level is stationary under optimal policy under commitment for a particular loss function. Specifically, the results obtained when the quasi-difference of inflation is used in the loss function, as in the hybrid new Keynesian model. Overall, the arguments in favor of or against PLPS depend upon the degree of dependence of private-sector expectations on the characteristics of the monetary policy regime.
Introduction
According to the conventional wisdom in central banking circles, PLPS is not an appropriate goal to delegate to an independent central bank. There is strong intuition behind this claim.
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- Chapter
- Information
- Challenges in Central BankingThe Current Institutional Environment and Forces Affecting Monetary Policy, pp. 21 - 51Publisher: Cambridge University PressPrint publication year: 2010
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