He wouldn't favour raising the target from 2%, nor does he think a price level target would be remotely appropriate to the UK right now, because our inflation has been too high, not too low.
In general, central banks prefer to target the inflation rate, partly because a price-level target is harder to explain, and partly because the need to reverse previous deviations from target may make output more volatile.
Another good argument in favour of a price-level target is that it helps repair balance sheets, so the financial system can work properly.
At the Bank of Japan's October monetary-policy meeting, Nobuyuki Nakahara, one of the independent members of the bank's policy board, proposed that the bank set a price-level target and examine ways to buy foreign bonds.
With an inflation-rate target, any undershooting of the goal is treated as over and done with, but with a price-level target any undershooting must be made up for later by a period of overshooting, so the inflation rate aimed for can vary from year to year.
However, Takatoshi Ito of Tokyo University and Frederic Mishkin of Columbia University argue that whereas inflation-rate targets may be best in normal times, once an economy is suffering deflation there is a stronger case for a price-level target because it requires a compensating period of higher-than-normal inflation.
Suppose that the Bank of Japan set a target for the price level based on an average inflation rate of 1% since 1998.
The CAP began operating in 1962, with the then European Community intervening to buy farm output when the market price fell below an agreed target level.
Various rules have been proposed, including a price-level rule (zero inflation), an inflation target rule (2 percent inflation), a nominal GDP target, and a Taylor rule designed to control the growth of nominal income by controlling the monetary base.
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But should the bank set a target for the annual inflation rate or for the price level?
Implied volatility on Target options also surged--options traders anticipating a 31.5% deviation in share prices, a level head and shoulders above Target's actual historical share-price variability of just 21.2%.
Set a price target, maybe 20% below the peak, and if the stock falls to that level, cash out.
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