Monetary Policy Rules and Stability: Inflation Targeting versus Price-Level Targeting

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Monetary Policy Rules and Stability: Inflation Targeting versus Price-Level Targeting

In the article "Monetary Policy Rules and Stability: Inflation Targeting versus Price-Level Targeting," Charles T. Carlstrom and Timothy S. Fuerst review the advantages of monetary policy rules—greater transparency and time consistent policies—and argue that price-level targeting results in more stable inflation than does inflation targeting and therefore is the superior monetary policy rule.

What is the dynamic inconsistency problem? Relate this to monetary policy and explain how it supports the argument for a policy rule.
What is inflation targeting? What are the advantages of this type of monetary policy rule?
Why might inflation targeting increase the variability of inflation?
How does a price-level target differ from an inflation target? Why can a price-level target reduce the variability of inflation?

Source: “Monetary Policy Rules and Stability: Inflation Targeting versus Price-Level Targeting.” Charles T. Carlstrom and Timothy S. Fuerst, Federal Reserve Bank of Cleveland Economic Commentary, February 15, 2002, pp. 1-3.

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