Hybrid Inflation-Price-Level Targeting in an Economy With Output Persistence

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Abstract

This paper investigates hybrid inflation-price-level targeting (HT), employing a Phillips curve with output persistence. By HT we mean that a central bank targets a weighted average of the optimal inflation rate and its corresponding price level. The analysis shows that if output is persistent to some extent, it is desirable to adopt HT because, relative to the case of alternative regimes such as inflation targeting (IT) and price-level targeting (PT), it will reduce the variability of inflation and thereby social loss. In addition, it is shown that the optimal hybrid-type target is uniquely determined according to the degree of persistence in output.

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