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Performance of inflation targeting based on constant interest rate projections

Listed author(s):
  • Honkapohja, Seppo
  • Mitra, Kaushik

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. Some other forms of CIR policy perform better, however. We also examine the properties of the different policy rules in the presence of inertial demand and price behaviour.

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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 29 (2005)
Issue (Month): 11 (November)
Pages: 1867-1892

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Handle: RePEc:eee:dyncon:v:29:y:2005:i:11:p:1867-1892
Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

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  8. Bennett T. McCallum & Edward Nelson, 1998. "Performance of Operational Policy Rules in an Estimated Semi-Classical Structural Model," NBER Working Papers 6599, National Bureau of Economic Research, Inc.
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