Abstract
The world’s central banks have undergone dramatic changes in the past fifteen years. Increases in independence and transparency have
been coupled with a shift in focus. Price stability is now the paramount objective for the vast majority of modern central bankers. Combined, these changes in central bank structure and policy framework have yielded substantial benefits. Low and stable inflation has brought with it high and stable growth.
Taking recent successes as a starting point, we look at the possibility for further improvements. Could countries benefit by shifting from inflation targeting to price-path targeting? The answer depends on the structure of each country’s economy—specifically, on how slowly output growth returns to its sustainable growth rate after moving away from the target. If deviations of output from its potential are relatively persistent, a country is likely to benefit from a shift to price-path targeting. As Svensson (1999b) argues, if the output gap is persistent, focusing on the price level rather than the inflation rate will contribute to reducing fluctuations in output and inflation under a discretionary rule.