| Author/Presenter |
Dirk Muir (Bank of Canada) |
| Co-authors |
Don Coletti (Bank of Canada) |
| |
Rene Lalonde (Bank of Canada) |
| |
Paul Masson (Rotman School of Management) |
| Title |
Inflation Targeting and Price-Level-Path Targeting in the Global Economy Model: Some Further Considerations from the Global Commodity and Oil Markets |
| Abstract |
In Coletti, Lalonde and Muir (2008), it was concluded that price-level-path targeting (PLPT) is slightly preferred to inflation targeting (IT), using a two-country version of the Global Economy Model (GEM), when a monetary policy rule is optimized with respect to a loss function containing CPI inflation and an output gap measure, based on the historical mix of shocks in the Canadian economy. Moreover, PLPT was preferred to IT when considering individual types of shocks to the economy, such as productivity shocks, domestic demand shocks, and terms-of-trade shocks. However, this smaller version of the model did not include the oil and commodity sectors (and associated sector-specific shocks). By including those sectors in a five-region version of the GEM, and looking at a shock-by-shock analysis focused on terms-of-trade shocks, we find that IT is preferred in numerous cases where the small model preferred PLPT. We posit this is the result of the new channel of commodity and oil price effects in the Canadian economy. Moreover, those price pressures are historically highly persistent, thereby reducing the effectiveness of PLPT, which under this version of the GEM causes much greater output variability than under IT. As a result, we conclude that IT is the preferred regime for a large variety of shocks, including permanent productivity shocks. |
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