Electronic Resource
Berkeley, Calif.
:
Berkeley Electronic Press (now: De Gruyter)
The @B.E. journal of macroeconomics
7.2007, 1, art26
ISSN:
1555-0486
Source:
Berkeley Electronic Press Academic Journals
Topics:
Economics
Notes:
The classical gold standard has long been associated with long-run price stability. But short-run price variability led critics of the gold standard to propose reforms that look much like modern versions of price-path targeting. This paper uses a dynamic stochastic general equilibrium model to examine price dynamics under alternative policy regimes. In the model, a pure inflation target provides more short-run price stability than does the gold standard and, although it introduces a unit root into the price level, it leads to as much long-term price stability as does the gold standard for horizons shorter than 20 years. Relative to these regimes, Fisher's compensated dollar (or pure price-path targeting) reduces inflation uncertainty by an order of magnitude at all horizons. A Taylor rule, with its relatively large weight on output, leads to large uncertainty about inflation at long horizons. This long-run inflation uncertainty can be largely eliminated by introducing an additional response to the deviation of the price level from a desired path.
Type of Medium:
Electronic Resource
URL:
http://www.bepress.com/bejm/vol7/iss1/art26
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