Short- and long-run price level uncertainty under different monetary policy regimes: an international comparison

This paper focuses on the implications of different monetary regimes for short- and long-run price uncertainty. We derive. expressions for the relative variance of short- and long-run uncertainty under price level targeting and price drift regimes and measure the relative size of these uncertainties in regimes dating from 1717 to present for several major economies. We find that: within regimes short- and long-run uncertainties are positively associated; across regimes this positive association increases with the drift in the price level; the marginal increase in short-run uncertainty under price level targeting is substantially larger than the marginal increase in long-run uncertainty under price drift; and it is short-run uncertainty that is more closely associated with real activity, regardless of regime choice. Our results may be viewed as suggesting that the postwar period move to more persistent inflation constitutes a move towards optimal monetary policy.