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Dominate a Rule for Zero Inflation

By William T. Gavin, Alan C. Stockman, James B. Thomson, Gary Whalen, William T. Gavin, Alan C. Stockman and Robin Ratliff

Abstract

There is a technical distinction between a zero-inflation rule and a price-level rule. The former allows bygones to be bygones; random shocks to the price level are allowed to accumulate over time. A price-level rule would require the Federal Reserve to offset these accumulated effects eventually. This paper shows that a rule for the price level may dominate a rule for the inflation rate, even in the case where, for purely economic reasons, an inflation rule is preferred. A price-level rule constrains the current behavior of policymakers because today's choices directly affect tomorrow's options. Economic Review is published quarterly by the Research Department of the Federal Reserve Bank of Cleveland. Copies of the Revie

Year: 2014
OAI identifier: oai:CiteSeerX.psu:10.1.1.413.6329
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