By Nicoletta Batini and Anthony Yates
The success and spread of inflation targeting (documented by, for example, Julius et al (2000)) has stimulated interest in the merits of price level targeting. Under inflation targeting, the expected variance of the price level increases without bound as we look further into the future; under price level targeting, policy acts to reverse shocks to the price level, and the expected variance is constant.
Hybrid inflation and price level targeting