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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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File URL: http://www.st-andrews.ac.uk/economics/CDMA/papers/cp0406.pdf
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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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Keywords: Indeterminacy; instability under learning; inflation targeting; inertia in demand; inflation inertia.;

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  1. anonymous, 2005. "Monetary policy and the economy," Monograph, Board of Governors of the Federal Reserve System (U.S.), number 2005mpat.
  2. George W. Evans & Seppo Honkapohja, 2003. "Adaptive learning and monetary policy design," Proceedings, Federal Reserve Bank of Cleveland, pages 1045-1084.
  3. Rudebusch, G.D. & Svensson, L.E.O., 1998. "Policy Rules for Inflation Targeting," Papers 637, Stockholm - International Economic Studies.
  4. 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.
  5. George W. Evans & Seppo Honkapohja, 2003. "Expectations and the Stability Problem for Optimal Monetary Policies," Review of Economic Studies, Oxford University Press, vol. 70(4), pages 807-824.
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Citations

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Cited by:
  1. 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).
  2. 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.
  3. 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.
  4. 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.
  5. Alessandro Flamini, 2012. "Interest Rate Forecasts in Inflation Targeting Open-Economies," DEM Working Papers Series 027, University of Pavia, Department of Economics and Management.
  6. Bhattacharjee, A. & Holly, S., 2005. "Inflation Targeting, Committee Decision Making and Uncertainty: The case of the Bank of England’s MPC," Cambridge Working Papers in Economics 0530, Faculty of Economics, University of Cambridge.
  7. Jordi Gali, 2008. "Are Central Banks' Projections Meaningful?," 2008 Meeting Papers 174, Society for Economic Dynamics.
  8. Thoma, Mark, 2008. "Structural change and lag length in VAR models," Journal of Macroeconomics, Elsevier, vol. 30(3), pages 965-976, September.
  9. Jordi Galí, 2010. "Are Central Banks' Projections Meaningful?," NBER Working Papers 16384, National Bureau of Economic Research, Inc.
  10. Galí, Jordi, 2011. "Are central banks' projections meaningful?," Journal of Monetary Economics, Elsevier, vol. 58(6), pages 537-550.
  11. 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).

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