Do Inflation-Targeting Central Banks Implicitly Target the Price Level?
by Francisco Ruge-Murcia
University of Montréal
This paper examines the time-series properties of the price
level in five inflation-targeting countries. For the regimes in
Australia, New Zealand, Sweden, and the United Kingdom,
the price level wanders away from the path implied by the
inflation target, and test results suggest that it has a unit
root. For the regime in Canada, the price level tracks the path
implied by the target and test results partly support the view
that it is covariance stationary. These results do not mean
that Canada covertly follows a price-level targeting regime
but suggest, instead, heterogeneity in the actual application
of inflation targeting across countries. Survey data on inflation
expectations are inconclusive as to whether agents treat the
Canadian price level as a trend-reverting process.
JEL Codes: E3, E5.
Full article (PDF, 26 pages, 491 kb)
Discussion by Guido Ascari