The Eventual Failure and Price Indeterminacy of Inflation Targeting
AbstractIn stark contrast to the previous literature, we find that IT leads to price indeterminacy even when the central bank uses a Taylor-like feedback rule to peg the nominal interest rate. We also find that there is no mechanism with IT to determine the current inflation rate or price level. We conclude that the previous literature has either committed mathematical errors involving infinity or misused the non-explosive criterion for ruling out speculative bubbles. To avoid making errors involving infinity, we analyze inflation targeting (IT) in a typical rational-expectations, pure-exchange, general-equilibrium model where the time horizon is arbitrarily large, but finite.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 1240.
Date of creation: 22 Nov 2006
Date of revision: 13 Dec 2006
inflation targeting; price determinacy; monetary policy; pegging interest rates; errors of infinity;
Find related papers by JEL classification:
- E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-01-14 (All new papers)
- NEP-MAC-2007-01-14 (Macroeconomics)
- NEP-MON-2007-01-14 (Monetary Economics)
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