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Performance of Inflation Targeting Based on Constant Interest Rate Projections

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  • Seppo Honkapohja
  • Kaushik Mitra

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 different policy rules in the presence of inertial demand and price behaviour.

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Bibliographic Info

Paper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Conference Paper Series with number 0406.

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Date of creation: Jun 2004
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Handle: RePEc:san:cdmacp:0406

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Postal: Department of Economics, University of St. Andrews, Fife KY16 9AL
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Web page: http://www.st-andrews.ac.uk/cdma
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Keywords: Indeterminacy; instability under learning; inflation targeting; inertia in demand; inflation inertia.;

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Cited by:
  1. 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.
  2. Galí, Jordi, 2011. "Are central banks' projections meaningful?," Journal of Monetary Economics, Elsevier, vol. 58(6), pages 537-550.
  3. Andreas Schabert & Markus Hörmann, 2009. "An Interest Rate Peg Might Be Better than You Think," Ruhr Economic Papers 0115, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
  4. 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).
  5. Michael Woodford, 2007. "Forecast Targeting as a Monetary Policy Strategy: Policy Rules in Practice," NBER Working Papers 13716, National Bureau of Economic Research, Inc.
  6. Lars E. O. Svensson, 2007. "Optimal inflation Targeting: Further Developments of Inflation Targeting," Central Banking, Analysis, and Economic Policies Book Series, in: Frederic S. Miskin & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Se (ed.), Monetary Policy under Inflation Targeting, edition 1, volume 11, chapter 6, pages 187-225 Central Bank of Chile.
  7. George Evans & Seppo Honkapohja, 2008. " Expectations, Learning and Monetary Policy: An Overview of Recent Research," CDMA Working Paper Series 0802, Centre for Dynamic Macroeconomic Analysis.
  8. Thoma, Mark, 2008. "Structural change and lag length in VAR models," Journal of Macroeconomics, Elsevier, vol. 30(3), pages 965-976, September.
  9. Galí, Jordi, 2010. "Are Central Banks' Projections Meaningful?," CEPR Discussion Papers 8027, C.E.P.R. Discussion Papers.
  10. 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).

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