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Price-Level Uncertainty, Price-Level Targeting, and Nominal Debt Contracts

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Many central banks around the world have embraced inflation targeting as a monetary policy framework. Interest is growing, however, in price-level targeting as an alternative. The choice of frameworks has important consequences for financial contracts, most of which are not fully indexed to the price level. Changes in the price level therefore lead to changes in the real value of contracts. Price-level targeting would reduce the size of these changes in real wealth and decrease uncertainty about the future price level. This article assesses the merits of price-level targeting vis-à-vis inflation targeting from a debt-revaluation perspective, with a focus on channels affecting risk premiums, the maturities of nominal debt contracts, and redistribution of wealth. A general conclusion flowing from the analysis is that accounting for the revaluation of nominal debts and assets strengthens the relative merits of price-level targeting compared with inflation-targeting.

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  • Allan Crawford & Césaire Meh & Yaz Terajima, 2009. "Price-Level Uncertainty, Price-Level Targeting, and Nominal Debt Contracts," Bank of Canada Review, Bank of Canada, vol. 2009(Spring), pages 33-43.
    • Handle: RePEc:bca:bcarev:v:2009:y:2009:i:spring09:p:33-43
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    Cited by:

    1. Michael, Hatcher, 2013. "Aggregate and welfare effects of long run inflation risk under inflation and price-level targeting," SIRE Discussion Papers 2013-19, Scottish Institute for Research in Economics (SIRE).
    2. Boris Cournède & Diego Moccero, 2009. "Is there a Case for Price-level Targeting?," OECD Economics Department Working Papers 721, OECD Publishing.
    3. Guido Ascari & Argia M. Sbordone, 2014. "The Macroeconomics of Trend Inflation," Journal of Economic Literature, American Economic Association, vol. 52(3), pages 679-739, September.
    4. Hatcher, Michael, 2014. "Indexed versus nominal government debt under inflation and price-level targeting," Journal of Economic Dynamics and Control, Elsevier, vol. 45(C), pages 126-145.
    5. David A. Dodge, 2010. "Reflections on the conduct of monetary and financial stability policy," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 43(1), pages 29-40, February.
    6. Hatcher, Michael C., 2011. "Comparing inflation and price-level targeting: A comprehensive review of the literature," Cardiff Economics Working Papers E2011/22, Cardiff University, Cardiff Business School, Economics Section.
    7. Evan F. Koenig, 2011. "Monetary policy, financial stability, and the distribution of risk," Working Papers 1111, Federal Reserve Bank of Dallas.
    8. Evan F. Koenig, 2013. "Like a Good Neighbor: Monetary Policy, Financial Stability, and the Distribution of Risk," International Journal of Central Banking, International Journal of Central Banking, vol. 9(2), pages 57-82, June.

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