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

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Author Info

  • David Eagle

    (Eastern Washington University)

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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File URL: http://128.118.178.162/eps/mac/papers/0501/0501028.pdf
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Bibliographic Info

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

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

Note: Type of Document - pdf; pages: 30
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Web page: http://128.118.178.162

Related research

Keywords: price indeterminancy; pegging interest rates; inflation targeting; nominal-income targeting; nominal-aggregate-demand targeting; price-level targeting;

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References

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  1. 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.
  2. 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.
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Cited by:
  1. David Eagle, 2005. "The Inflation Dynamics of Pegging Interest Rates," Macroeconomics 0502029, EconWPA.
  2. David Eagle, 2005. "Multiple Critiques of Woodford’s Model of a Cashless Economy," Macroeconomics 0504028, EconWPA.

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