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Economic Commentary

Monetary Policy Rules and Stability: Inflation Targeting versus Price-Level Targeting

Monetary policy rules help central banks exercise the discipline necessary to achieve their long-term goals. The type of rule many banks are turning to these days is inflation targeting, which has several advantages. But in following the rule, banks usually base their actions on forecasts of future inflation, and this can lead to inflation-rate instability in some cases. A price-level target offers many of the same benefits as an inflation target, but because it uses past inflation to guide the bank’s actions, it avoids this vulnerability.

The views authors express in Economic Commentary are theirs and not necessarily those of the Federal Reserve Bank of Cleveland or the Board of Governors of the Federal Reserve System. The series editor is Tasia Hane. This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License. This paper and its data are subject to revision; please visit for updates.

Suggested Citation

Carlstrom, Charles T., and Timothy S. Fuerst. 2002. “Monetary Policy Rules and Stability: Inflation Targeting versus Price-Level Targeting.” Federal Reserve Bank of Cleveland, Economic Commentary 2/15/2002.