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On the other hand, authorities could act to secure domestic price level stability and leave the exchange rate to be determined by bank agreement.
Although this framework is relatively clear, its critics have asked what role the output gap might play, and given the ECB's commitment to price level stability in the medium term, a different formulation may be useful.
Price level stability in the medium term is clearly important, and it changes the nature of the strategy the ECB might adopt as compared to simple inflation targeting.
By defining price level stability more flexibly in a risky and uncertain economy, which is most certainly stochastic in nature, rather than adhering rigidly to an inflation target, there is more room, although still constrained by a price level stability objective for monetary policy, to vary the key central bank interest rate, its timing, the number and amount of changes to achieve price level stability, and maximization of sustainable growth.
5] We use a standard loss function in output and inflation variability and a simple backward/forward looking model to assess whether price level targeting may be useful even if society does not care about price level stability per se.
The case for price level stability is a very old one.
As briefly discussed above, there is a long and old Literature on why society and central banks may care about price level stability per se.