That is because those firms that are able to will raise their price in response to a shock that raises the overall price level relative to target. If the central bank subsequently seeks to bring the overall price level back on to the originally prescribed path, then the relative price of those firms will be too high. It is better instead to allow some base drift in order to reduce the average (squared) distortion in relative prices across the economy as a whole. That suggests that some hybrid of price-level and inflation targeting may be a good idea; targeting average inflation over a run of years is one way to approximate such a hybrid regime (King, 1999). A final issue with price-level targeting lies in communications. While the public can probably relate to the idea of inflation as the average rate at which prices in the economy are changing, it less clear that they will understand what a consumer price level index means. Such a target for the price-level would therefore probably need to be portrayed as stabilising average inflation over a very long period. The extent to which a shift to targeting the price-level, rather than inflation, acts as a bulwark against the ZLB is ultimately an empirical issue. Interestingly, however, the behaviour of the price level in many advanced economies during the Great Moderation suggests that it might not make a lot of difference whether or not countries move to targeting a path for prices rather than inflation.
One can, however, answer a slightly different and more straightforward question, namely what impact the accommodative policy stance had on asset prices and credit growth. Bernanke goes on to provide time-series and crosscountry evidence, which suggests that monetary policy played a relatively modest role in the boom in house prices in the United States and a number of other countries. Chart 1 shows that both UK and euro-area policy rates were less noticeably out of line with their respective Taylor benchmarks. That too is striking. Indeed, in the United Kingdom, they were actually above the benchmark for much of the relevant period, even though the United Kingdom saw one of the larger run-ups in debt and house prices during this period. And, in the euro area, countries such as Spain experienced substantial house price booms, while countries such as Germany did not. That need not imply that monetary policy was innocent in the run-up to the crisis, as the equilibrium real interest rate could have been higher in the United Kingdom than in the calibrated Taylor rule. And differences in equilibrium real interest rates across countries can in principle explain the heterogeneity in the euro area. But this is hardly compelling evidence for assigning the central role to monetary policy, suggesting that other factors were more important. To complement Bernanke’s analysis, we provide some further evidence on the impact of policy on credit and asset prices, obtained from estimated vector auto-regressions for the United States and the United Kingdom.