Price-level targeting would improve economic stability

The value of money would be more predictable in the long term

Price-level targeting (PT) would ensure greater long-term stability in the value of money, whilst also enhancing general economic and financial stability, according to a new study* from the Institute of Economic Affairs, authored by Professor Steve Ambler**, former Special Adviser to the Bank of Canada.

Under the inflation targeting (IT) regime currently followed by the Bank of England and most other central banks, the price level becomes increasingly hard to predict in the longer term because a sudden burst of inflation or deflation will not be reversed. And while the formal adoption of IT has been associated with increased price level and output stability, the onset of the current financial crisis has changed this perception.

Price-level targeting always ensures that the price level is returned to its target path. It therefore makes it easier for central banks to ensure stability in the value of money in