Price-level targeting brings gains

Adopting an optimal price-level target instead of an optimal inflation-targeting regime can bring additional welfare gains, a new paper from the Bank of Canada finds.

The authors find that price-level targeting reduces the welfare cost of business cycle fluctuations and smoothes consumption.

This is related to the ability of the optimal price-level targeting rule to minimise the uncertainty generated by nominal debt contracts in the credit market. The occurrence of financial shocks also

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