An alternative to inflation targeting?

There could be a better alternative to inflation targeting, which became all the vogue among central bankers in the last two decades but now has doubters. Rather than target a rate of inflation, as is now custom, target a level of prices.

Price level targeting, its proponents say, would give central banks more flexibility to respond aggressively to downturns and crises without sacrificing their inflation fighting credibility. When inflation undershoots during a recession, it would allow the central bank to run the economy hot and allow inflation to overshoot for a while in a recovery.

Many central banks now target a rate of inflation. The Federal Reserve, for instance, has an informal goal of 1.5% to 2% inflation over the long run [3% to 6% in South Africa]. Targeting became popular in the 1990s and 2000s because central bankers felt it helped build their inflation fighting credibility, which anchored expectations for future inflation, kept interest rates low and helped to keep the economy robust and stable.