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Inflation-targeting, price-path targeting and indeterminacy

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  • Dittmar, Robert D.
  • Gavin, William T.

Abstract

In this paper, we examine the areas of indeterminacy in a flexible price RBC model with shopping time role for money and a central bank that uses an interest rate rule to target inflation and/or the price level. We present analytical results showing that, although inflation targeting often results in real indeterminacy, a price level target generally delivers a unique equilibrium for a relevant range of policy parameters.

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Bibliographic Info

Article provided by Elsevier in its journal Economics Letters.

Volume (Year): 88 (2005)
Issue (Month): 3 (September)
Pages: 336-342

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Handle: RePEc:eee:ecolet:v:88:y:2005:i:3:p:336-342

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References

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  1. McCallum, Bennett T., 2003. "Multiple-solution indeterminacies in monetary policy analysis," Journal of Monetary Economics, Elsevier, vol. 50(5), pages 1153-1175, July.
  2. Jess Benhabib & Stephanie Schitt-Grohe & Martin Uribe, 2002. "Backward-Looking Interest-Rate Rules, Interest-Rate Smoothing, and Macroeconomic Instability," PIER Working Paper Archive 03-005, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 14 Feb 2003.
  3. Marc P. Giannoni, 2010. "Optimal Interest-Rate Rules in a Forward-Looking Model, and Inflation Stabilization versus Price-Level Stabilization," NBER Working Papers 15986, National Bureau of Economic Research, Inc.
  4. Benhabib, Jess & Farmer, Roger E.A., 1999. "Indeterminacy and sunspots in macroeconomics," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 6, pages 387-448 Elsevier.
  5. Robert Dittmar & William Gavin & Finn Kydland, 2002. "Inflation Persistence and Flexible Prices," Computing in Economics and Finance 2002 190, Society for Computational Economics.
  6. Charles T. Carlstrom & Timothy S. Fuerst, 2001. "Real Indeterminacy in Monetary Models with Nominal Interest Rate Distortions," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(4), pages 767-789, October.
  7. Bennett T. McCallum, 1982. "Price Level Determinacy with an Interest Rate Policy Rule and Rational Expectations," NBER Working Papers 0559, National Bureau of Economic Research, Inc.
  8. Carlstrom, Charles T. & Fuerst, Timothy S., 2001. "Timing and real indeterminacy in monetary models," Journal of Monetary Economics, Elsevier, vol. 47(2), pages 285-298, April.
  9. Sargent, Thomas J & Wallace, Neil, 1975. ""Rational" Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 83(2), pages 241-54, April.
  10. McCallum, Bennett T., 1986. "Some issues concerning interest rate pegging, price level determinacy, and the real bills doctrine," Journal of Monetary Economics, Elsevier, vol. 17(1), pages 135-160, January.
  11. Woodford, Michael, 2003. "Comment on: Multiple-solution indeterminacies in monetary policy analysis," Journal of Monetary Economics, Elsevier, vol. 50(5), pages 1177-1188, July.
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Cited by:
  1. Eagle, David, 2007. "Revealing the naked truth behind price determinacy, infinite-horizon rational expectations, and inflation targeting," MPRA Paper 1538, University Library of Munich, Germany.
  2. Michael D. Bordo & Robert D. Dittmar & William T. Gavin, 2003. "Gold, Fiat Money, and Price Stability," NBER Working Papers 10171, National Bureau of Economic Research, Inc.
  3. Guender, Alfred V. & Oh, Do Yoon, 2006. "Price stability through price-level targeting or inflation targeting? A tale of two experiments," Journal of Economics and Business, Elsevier, vol. 58(5-6), pages 373-391.
  4. Sofía Bauducco & Rodrigo Caputo, 2013. "Wicksell Versus Taylor: A Quest for Determinancy and the (IR) Relevance of the Taylor Principle," Working Papers Central Bank of Chile 705, Central Bank of Chile.
  5. Oleksiy Kryvtsov & Malik Shukayev & Alexander Ueberfeldt, 2007. "Optimal Monetary Policy and Price Stability Over the Long-Run," Working Papers 07-26, Bank of Canada.

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