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Performance of inflation targeting based on constant interest rate projections

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  • Honkapohja, Seppo
  • Mitra, Kaushik

Abstract

Monetary policy is sometimes formulated in terms of a target level of inflation, a fixed time horizon and a constant interest rate that is anticipated to achieve the target at the specified horizon. These requirements lead to constant interest rate (CIR)instrument rules. Using the standard New Keynesian model, it is shown that some forms of CIR policy lead to both indeterminacy of equilibria and instability under adaptive learning. However, some other forms of CIR policy perform better. We also examine the properties of the different policy rules in the presence of inertial demand and price behaviour. --

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 29 (2005)
Issue (Month): 11 (November)
Pages: 1867-1892

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Handle: RePEc:eee:dyncon:v:29:y:2005:i:11:p:1867-1892

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  1. Glenn D. Rudebusch & Lars E. O. Svensson, 1998. "Policy Rules for Inflation Targeting," NBER Working Papers 6512, National Bureau of Economic Research, Inc.
  2. Leitemo, Kai, 2003. " Targeting Inflation by Constant-Interest-Rate Forecasts," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(4), pages 609-26, August.
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  7. Jeff Fuhrer & George Moore, 1993. "Inflation persistence," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
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Cited by:
  1. Michael Woodford, 2012. "Forecast Targeting as a Monetary Policy Strategy - Policy Rules in Practice," Book Chapters, in: Evan F. Koenig & Robert Leeson & George A. Kahn (ed.), The Taylor Rule and the Transformation of Monetary Policy, chapter 9 Hoover Institution, Stanford University.
  2. Evans, George & Honkapohja, Seppo, 2008. "Expectations, Learning and Monetary Policy: An Overview of Recent Research," SIRE Discussion Papers 2008-03, Scottish Institute for Research in Economics (SIRE).
  3. Jordi Gali, 2008. "Are Central Banks' Projections Meaningful?," 2008 Meeting Papers 174, Society for Economic Dynamics.
  4. Jordi Galí, 2010. "Are Central Banks' Projections Meaningful?," NBER Working Papers 16384, National Bureau of Economic Research, Inc.
  5. Arnab Bhattacharjee & Sean Holly, 2004. "Inflation Targeting, committee Decision Making and Uncertainty: The case of the Bank of England's MPC," Money Macro and Finance (MMF) Research Group Conference 2004 63, Money Macro and Finance Research Group.
  6. Hörmann, Markus & Schabert, Andreas, 2009. "An interest rate peg might be better than you think," Economics Letters, Elsevier, vol. 105(2), pages 156-158, November.
  7. Galí, Jordi, 2011. "Are central banks' projections meaningful?," Journal of Monetary Economics, Elsevier, vol. 58(6), pages 537-550.
  8. Adolfson, Malin & Laséen, Stefan & Lindé, Jesper & Villani, Mattias, 2005. "Are Constant Interest Rate Forecasts Modest Interventions? Evidence from an Estimated Open Economy DSGE Model of the Euro Area," Working Paper Series 180, Sveriges Riksbank (Central Bank of Sweden).
  9. Flamini Alessandro, 2012. "Interest Rate Forecasts in Inflation Targeting Open-Economies," Economia politica, Società editrice il Mulino, issue 3, pages 381-408.
  10. Berg, Claes & Jansson, Per & Vredin, Anders, 2004. "How Useful are Simple Rules for Monetary Policy? The Swedish Experience," Working Paper Series 169, Sveriges Riksbank (Central Bank of Sweden).
  11. Thoma, Mark, 2008. "Structural change and lag length in VAR models," Journal of Macroeconomics, Elsevier, vol. 30(3), pages 965-976, September.

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