Price Indeterminacy Reinvented: Pegging Interest Rates While Targeting Prices, Inflation, or Nominal Income

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Price Indeterminacy Reinvented: Pegging Interest Rates While Targeting Prices, Inflation, or Nominal Income

Author Info

David Eagle (Eastern Washington University)

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David Eagle

Abstract

Contrary to Sargent and Wallace (1975), a central bank’s use of an interest-rate instrument does determine prices when the central bank pursues either a short-term or long-term price target. However, in order for a central bank’s pursuit of a long-term price target to be credible, the public still needs something like a Taylor or McCallum-Woodford rule. The use of an interest-rate instrument also determines prices when the central bank targets nominal income in either the short-term or long-term. However, if the central bank targets interest rates in the short term with a long-term inflation target, then prices are indeterminate.

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Paper provided by EconWPA in its series Macroeconomics with number 0501028.

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Length: 30 pages
Date of creation: 20 Jan 2005
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Handle: RePEc:wpa:wuwpma:0501028

Note: Type of Document - pdf; pages: 30
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Find related papers by JEL classification:
E - Macroeconomics and Monetary Economics

This paper has been announced in the following NEP Reports:

NEP-ALL-2005-01-23 (All new papers)
NEP-CBA-2005-01-23 (Central Banking)
NEP-MAC-2005-01-23 (Macroeconomics)
NEP-MON-2005-01-23 (Monetary Economics)

References listed on IDEAS
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.:

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. [Downloadable!] (restricted)
Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December. [Downloadable!] (restricted)

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Cited by:
(explanations, 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.)

David Eagle, 2005. "Multiple Critiques of Woodford’s Model of a Cashless Economy," Macroeconomics 0504028, EconWPA. [Downloadable!]
David Eagle, 2005. "The Inflation Dynamics of Pegging Interest Rates," Macroeconomics 0502029, EconWPA. [Downloadable!]

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This page was last updated on 2009-11-3.

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