Discretionary monetary policy actions aimed at expanding a nation’s economy may simply produce an excessive rate of inflation without a corresponding increase in output or employment levels. Various proposals have been advanced to eliminate this inflationary bias, such as building a reputation for price stability and making the central bank independent of political pressure.
The capacity utilization rate is a commonly used indicator of future price changes. Studies often find that the total industry capacity utilization rate and inflation are correlated. Peter S. Yoo examines capacity utilization rate data and price data for 23 industrial sectors to see if the two variables show significant correlations within individual industries.
Targeting the price level, rather than the inflation rate, permits the future price level to be known and long-run plans to be made more easily. Despite these advantages, countries have adopted inflation targets because price level targets require policymakers to reduce the price level to a pre-announced value after an inflationary shock.
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