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Indeterminacy with Inflation-Forecast-Based Rules in a Two-Bloc Model

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Author Info

  • Nicoletta Batini

    (IMF)

  • Paul Levine

    (University of Surrey)

  • Joseph Pearlman

    (London Metropolitan University)

Abstract

We examine the performance of forward-looking inflation-forecast-based rules in open economies. In a New Keynesian two-bloc model, a methodology first employed by Batini and Pearlman (2002) is used to obtain analytically the feedback parameters/horizon pairs associated with unique and stable equilibria. Three key findings emerge: first, indeterminacy occurs for any value of the feedback parameter on inflation if the forecast horizon lies too far into the future. Second, the problem of indeterminacy is intrinsically more serious in the open economy. Third, the problem is compounded further in the open economy when central banks respond to expected consumer, rather than producer price inflation.

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Bibliographic Info

Paper provided by School of Economics, University of Surrey in its series School of Economics Discussion Papers with number 0204.

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Length: 41 pages
Date of creation: Jun 2004
Date of revision:
Handle: RePEc:sur:surrec:0204

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Keywords: Taylor rules; inflation-forecast-based rules; indeterminacy; open economy;

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References

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  4. Ben S. Bernanke & Michael Woodford, 1997. "Inflation Forecasts and Monetary Policy," NBER Working Papers 6157, National Bureau of Economic Research, Inc.
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  11. Efrem Castelnuovo, 2003. "Taylor Rules and Interest Rate Smoothing in the US and EMU," Macroeconomics 0303002, EconWPA.
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  15. Charles T. Carlstrom & Timothy S. Fuerst, 2001. "Real indeterminacy in monetary models with nominal interest rate distortions: the problem with inflation targets," Working Paper 9818R, Federal Reserve Bank of Cleveland.
  16. Currie,David & Levine,Paul, 1993. "Rules, Reputation and Macroeconomic Policy Coordination," Cambridge Books, Cambridge University Press, number 9780521441964.
  17. Fiorella De Fiore & Zheng Liu, 2003. "Openness and Equilibrium Determinacy under Interest Rate Rules," Emory Economics 0310, Department of Economics, Emory University (Atlanta).
  18. Nicoletta Batini & Edward Nelson, 1999. "Optimal Horizons for Inflation Targeting," Computing in Economics and Finance 1999 1052, Society for Computational Economics.
  19. 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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