Do Inflation-Targeting Central Banks Implicitly Target the Price Level?

This paper examines the time-series properties of the price level in five inflation-targeting countries. For the regimes in Australia, New Zealand, Sweden, and the United Kingdom, the price level wanders away from the path implied by the inflation target, and test results suggest that it has a unit root. For the regime in Canada, the price level tracks the path implied by the target and test results partly support the view that it is covariance stationary. These results do not mean that Canada covertly follows a price-level targeting regime but suggest, instead, heterogeneity in the actual application of inflation targeting across countries. Survey data on inflation expectations are inconclusive as to whether agents treat the Canadian price level as a trend-reverting process.