Price-Level Targeting and Inflation Expectations: Experimental Evidence

The theoretical stabilization benefits of price-level targeting (PLT) in a low interest rate environment generated substantial interest in PLT among academics and policymakers. This paper uses a controlled laboratory environment to simulate a sudden transition from inflation targeting to PLT to assess whether people would change their inflation expectations to be consistent with the new policy framework. Without such expectation adjustments, PLT often leads to worse outcomes than inflation targeting in mainstream macroeconomic models. Our results suggest that participants formulate inflation expectations consistent with the target-reverting nature of the price level but do not fully utilize it in forecasting inflation.

Authors

• Malik Shukayev
• Robert Amano

JEL codes

• E32
• E52