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The Eventual Failure and Price Indeterminacy of Inflation Targeting

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  • Eagle, David

Abstract

In 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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File URL: http://mpra.ub.uni-muenchen.de/1883/
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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 1240.

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Date of creation: 22 Nov 2006
Date of revision: 13 Dec 2006
Handle: RePEc:pra:mprapa:1240

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Related research

Keywords: inflation targeting; price determinacy; monetary policy; pegging interest rates; errors of infinity;

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  1. Charles T. Carlstrom & Timothy S. Fuerst, 2001. "Timing and real indeterminacy in monetary models," Working Paper 9910R, Federal Reserve Bank of Cleveland.
  2. 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.
  3. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
  4. Bennett McCallum, 1999. "Role of the Minimal State Variable Criterion in Rational Expectations Models," International Tax and Public Finance, Springer, vol. 6(4), pages 621-639, November.
  5. Ovidiu L. Calin & Yu Chen & Thomas F. Cosimano & Alex A. Himonas, 2005. "Solving Asset Pricing Models when the Price-Dividend Function Is Analytic," Econometrica, Econometric Society, vol. 73(3), pages 961-982, 05.
  6. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-11, July.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. On the perils of Taylor rules
    by David Andolfatto in MacroMania on 2012-12-28 20:20:00

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