Bank of Finland paper tests price-level based forward guidance
Price-level targeting can outperform inflation targeting
Price-level targeting may, under certain conditions, outperform inflation targeting, according to the authors of a discussion paper published yesterday by the Bank of Finland.
Central bank board member Seppo Honkapohja and Kaushik Mitra of the University of Birmingham take an "adaptive learning" approach in their paper, Comparing inflation and price-level targeting: the role of forward guidance and transparency. Agents update their forecasts for inflation based on shocks to their expectations.
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