Adopting Price-Level Targeting under Imperfect Credibility in ToTEM

Gino Cateau, Oleksiy Kryvtsov, Malik Shukayev & Alexander Ueberfeldt
Using the Bank of Canada's main projection and policy-analysis model, ToTEM, this paper measures the welfare gains of switching from inflation targeting to price-level targeting under imperfect credibility. Following the policy change, private agents assign a probability to the event that the policy-maker will revert to inflation-targeting next period. As this probability decreases and imperfect credibility abates, inflation expectations in the economy become consistent with price-level targeting. The paper finds a large welfare gain when...
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