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Performance of Inflation Targeting Based On Constant Interest Rate Projections

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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 di?erent policy rules in the presence of inertial demand and price behaviour.

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Bibliographic Info

Paper provided by Department of Economics, Royal Holloway University of London in its series Royal Holloway, University of London: Discussion Papers in Economics with number 04/15.

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Length: 33 pages
Date of creation: Jul 2004
Date of revision: Jul 2004
Handle: RePEc:hol:holodi:0415

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Keywords: Indeterminacy; instability under learning; inflation targeting; inertia in demand; inflation inertia;

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  1. George W. Evans & Seppo Honkapohja, 2004. "Adaptive learning and monetary policy design," Macroeconomics 0405008, EconWPA.
  2. Kaushik Mitra & Seppo Honkapohja, 2004. "Are Non-Fundamental Equilibria Learnable in Models of Monetary Policy?," Royal Holloway, University of London: Discussion Papers in Economics 04/13, Department of Economics, Royal Holloway University of London, revised Jul 2004.
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Citations

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Cited by:
  1. Jordi Gali, 2008. "Are Central Banks' Projections Meaningful?," 2008 Meeting Papers 174, Society for Economic Dynamics.
  2. Galí, Jordi, 2010. "Are Central Banks' Projections Meaningful?," CEPR Discussion Papers 8027, C.E.P.R. Discussion Papers.
  3. Galí, Jordi, 2011. "Are central banks' projections meaningful?," Journal of Monetary Economics, Elsevier, vol. 58(6), pages 537-550.
  4. 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.
  5. 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.
  6. 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).
  7. Sean Holly & Arnab Bhattacharjee, 2005. "Inflation Targeting, Committee Decision Making and Uncertainty: The case of the Bank of England's MPC," Computing in Economics and Finance 2005 119, Society for Computational Economics.
  8. George W. Evans & Seppo Honkapohja, 2008. "Expectations, Learning and Monetary Policy: An Overview of Recent Research," CDMA Working Paper Series 200802, Centre for Dynamic Macroeconomic Analysis.
  9. 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).
  10. Alessandro Flamini, 2012. "Interest Rate Forecasts in Inflation Targeting Open-Economies," DEM Working Papers Series 027, University of Pavia, Department of Economics and Management.
  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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