Price Level Targeting

A A A

DEFINITION

A monetary policy goal of keeping overall price levels stable, or meeting a pre-determined price level target. The price level used as a barometer is the Consumer Price Index (CPI), or some similarly broad measure of cost inputs. A central bank or monetary authority operating under a price level targeting system raises or lowers interest rates in order to keep the index level consistent from year to year.

INVESTOPEDIA EXPLAINS

Price level targeting is similar to inflation targeting in that both establish targets for a price index like the CPI. However, where inflation targeting only looks forward (i.e., a 2% inflation target per year), price level targeting actually takes past years into account when conducting open market operations. So, if the price level rose by 2% in the previous year (from a theoretical base of 100 to 102), the price level would have to drop the next year in order to bring the price level back down to the 100 target level. This could mean more forceful action needs to be taken than would be required if inflation targeting were used.

Price level targeting is generally considered a risky policy stance, and one not used by any of the world's advanced economies. It is believed to bring more variability in inflation and employment in the short run compared to inflation targeting Most economies feel that a small amount of annual inflation is actually a good thing, up to about 2% per year.


RELATED TERMS
  1. Federal Funds Rate

    The interest rate at which a depository institution lends funds maintained at ...
  2. Harmonized Index Of Consumer Prices ...

    A list of the final costs paid by European consumers for the items in a basket ...
  3. Monetary Policy

    The actions of a central bank, currency board or other regulatory committee ...
  4. Push On A String

    When monetary policy cannot entice consumers into spending more money or investing ...
  5. LIBOR

    LIBOR or ICE LIBOR (previously BBA LIBOR) is a benchmark rate that some of the ...
  6. Global Recession

    An extended period of economic decline around the world. The International Monetary ...
  7. Economic Exposure

    A type of foreign exchange exposure caused by the effect of unexpected currency ...
  8. Subprime Meltdown

    The sharp increase in high-risk mortgages that went into default beginning in ...
  9. Event Risk

    1. The risk due to unforeseen events partaken by or associated with a company. ...
  10. Heckscher-Ohlin Model

    An economic theory that states that countries export what they can most easily ...
Related Articles
  1. How The U.S. Government Formulates Monetary ...
    Personal Finance

    How The U.S. Government Formulates Monetary ...

  2. The Importance Of Inflation And GDP
    Economics

    The Importance Of Inflation And GDP

  3. How does the government influence the ...
    Investing

    How does the government influence the ...

  4. The Federal Reserve
    Economics

    The Federal Reserve

  5. Herding Tendencies Among Analysts
    Investing Basics

    Herding Tendencies Among Analysts

  6. How the Cost of Living Affects Your ...
    Personal Finance

    How the Cost of Living Affects Your ...

  7. Understanding Leveraged Buyouts
    Fundamental Analysis

    Understanding Leveraged Buyouts

  8. How Inflation Affects Your Cost of Living ...
    Personal Finance

    How Inflation Affects Your Cost of Living ...

  9. How The Sarbanes-Oxley Era Affected ...
    Fundamental Analysis

    How The Sarbanes-Oxley Era Affected ...

  10. Where's The Market Headed Now?
    Fundamental Analysis

    Where's The Market Headed Now?

comments powered by Disqus
Hot Definitions
  1. Pension Risk Transfer

    When a defined benefit pension provider offloads some or all of the plan’s risk – e.g.: retirement payment liabilities to former employee beneficiaries. The plan sponsor can do this by offering vested plan participants a lump-sum payment to voluntarily leave the plan, or by negotiating with an insurance company to take on the responsibility for paying benefits.
  2. XW

    A symbol used to signify that a security is trading ex-warrant. XW is one of many alphabetic qualifiers that act as a shorthand to tell investors key information about a specific security in a stock quote. These qualifiers should not be confused with ticker symbols, some of which, like qualifiers, are just one or two letters.
  3. Quanto Swap

    A swap with varying combinations of interest rate, currency and equity swap features, where payments are based on the movement of two different countries' interest rates. This is also referred to as a differential or "diff" swap.
  4. Genuine Progress Indicator - GPI

    A metric used to measure the economic growth of a country. It is often considered as a replacement to the more well known gross domestic product (GDP) economic indicator. The GPI indicator takes everything the GDP uses into account, but also adds other figures that represent the cost of the negative effects related to economic activity (such as the cost of crime, cost of ozone depletion and cost of resource depletion, among others).
  5. Accelerated Share Repurchase - ASR

    A specific method by which corporations can repurchase outstanding shares of their stock. The accelerated share repurchase (ASR) is usually accomplished by the corporation purchasing shares of its stock from an investment bank. The investment bank borrows the shares from clients or share lenders and sells them to the company.
  6. Microeconomic Pricing Model

    A model of the way prices are set within a market for a given good. According to this model, prices are set based on the balance of supply and demand in the market. In general, profit incentives are said to resemble an "invisible hand" that guides competing participants to an equilibrium price. The demand curve in this model is determined by consumers attempting to maximize their utility, given their budget.
Trading Center