Price-level targeting
Price-level targeting commits a central bank to make up for past deviations from a target price path — so overshoots must be corrected by undershoots, giving the framework stronger automatic stabilisers than standard inflation targeting.
What it is
Standard inflation targeting — the framework used by the Fed, ECB, and Bank of England — targets the rate of price change: typically 2% per year. If inflation runs at 3% for a year, the central bank tries to bring it back to 2% going forward. It does not try to compensate for the year of overshoot.
Price-level targeting operates differently: it targets the level of prices along a pre-announced path (e.g., prices should always equal 100 × 1.02^t for t years from a base date). If prices rise too fast for a year, the central bank must allow below-target inflation the following year to bring the level back to path. If prices fall below path (e.g., in a recession), the central bank must allow above-target inflation to "catch up". The commitment to make up for past misses is automatic, rule-based, and transparent.
Why economists find it attractive
Price-level targeting has strong theoretical advantages at the zero lower bound on interest rates. When a central bank hits zero interest rates and cannot cut further, standard inflation targeting loses traction — the bank cannot credibly promise to generate more inflation. Under price-level targeting, a credible commitment to restore the price path automatically generates expectations of future above-target inflation, lowering real (inflation-adjusted) interest rates even when nominal rates are stuck at zero. This is more powerful stimulus than standard QE promises.
The approach was theoretically developed by Lars Svensson and advocated prominently by Ben Bernanke as a tool for Japan in the 2000s. The Fed's 2020 shift to average inflation targeting (AIT) — where it committed to make up for periods of below-2% inflation — was a partial move toward price-level targeting logic. The Fed's 2020 Framework Review explains the reasoning.
Why it is rarely used in practice
Price-level targeting faces a credibility and communication challenge. When inflation overshoots, the commitment to undershoot subsequently can be painful — it may require a recession to drive inflation below 2% for long enough to restore the price level. Markets and households may not trust that a central bank will deliberately accept below-target inflation even as the economy weakens.
Standard inflation targeting "lets bygones be bygones" — overshoots are forgiven once inflation returns to 2%. This is easier to communicate and maintain credibility for. The tension with inflation expectations management is the key practical obstacle. Sweden's Riksbank experimented with price-level targeting in the 1930s (the world's first explicit targeting framework) but the modern variants remain largely theoretical proposals rather than adopted practice. Compare this to the standard inflation target framework used universally among advanced economy central banks today.