Liquidity Traps and the Price (In)Determinacy of Monetary Rules
AbstractThis paper proposes a new methodology for assessing price indeterminacy to supplant the discredited nonexplosive criterion. Using this methodology, we find that nominal GDP targeting and price-level targeting do determine prices when the central bank follows a sufficiently strong feedback rule for setting the nominal interest rate. However, inflation targeting leads to price indeterminacy, a result consistent with the principles of calculus. This price indeterminacy of inflation targeting could manifest itself in a liquidity trap or zero bound for nominal interest rates rendering central banks impotent. Nominal GDP targeting could overcome this liquidity-trap effect.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 42416.
Date of creation: 02 Nov 2012
Date of revision:
inflation targeting; price-level targeting; nominal GDP inflation targeting; price-level targeting; nominal income targeting; price determinacy; liquidity trap;
Find related papers by JEL classification:
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-11-17 (All new papers)
- NEP-CBA-2012-11-17 (Central Banking)
- NEP-MAC-2012-11-17 (Macroeconomics)
- NEP-MON-2012-11-17 (Monetary Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Charles T. Carlstrom & Timothy S. Fuerst, 2001.
"Timing and real indeterminacy in monetary models,"
Working Paper, Federal Reserve Bank of Cleveland
9910R, Federal Reserve Bank of Cleveland.
- Eagle, David M., 2012. "Nominal GDP targeting for a speedier economic recovery," MPRA Paper 39821, University Library of Munich, Germany.
- Tomoyuki Nakajima & Herakles Polemarchakis, 2005. "Money and Prices Under Uncertainty," Review of Economic Studies, Oxford University Press, vol. 72(1), pages 223-246.
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