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Real indeterminacy in monetary models with nominal interest rate distortions: the problem with inflation targets

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  • Charles T. Carlstrom
  • Timothy S. Fuerst

Abstract

This paper demonstrates that in a standard monetary model with a cash-in-advance constraint on consumption there exists real indeterminacy whenever the nominal interest rate moves too closely with the real rate. A particular example of such a policy is an inflation rate target. This is not a knife-edge result. The conclusion is robust to a wide range of calibrations and to a monetary environment that allows for endogenous velocity.

Suggested Citation

  • Charles T. Carlstrom & Timothy S. Fuerst, 2001. "Real indeterminacy in monetary models with nominal interest rate distortions: the problem with inflation targets," Working Papers (Old Series) 9818R, Federal Reserve Bank of Cleveland.
    • Handle: RePEc:fip:fedcwp:9818
    DOI: 10.26509/frbc-wp-199818R
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    More about this item

    Keywords

    Monetary policy; Inflation (Finance);

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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