Determinacy under inflation targeting interest rate policy in a sticky price model with investment (and labor bargaining)
In a sticky price model with investment spending, recent research shows that inflation-forecast targeting interest rate policy makes determinacy of equilibrium essentially impossible. We examine a necessary and sufficient condition for determinacy under interest rate policy that responds to a weighted average of an inflation forecast and current inflation. This condition demonstrates that the average-inflation targeting policy ensures determinacy as long as both the response to average inflation and the relative weight of current inflation are large enough. We also find that interest rate policy which responds solely to past inflation guarantees determinacy when its response satisfies the Taylor principle and is not large. These results still hold even when wages and hours worked are determined by Nash bargaining.
|Date of creation:||2010|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: (816) 881-2254
Web page: http://www.kansascityfed.org/
More information through EDIRC
|Order Information:|| Email: |
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.:
- Zanetti, Francesco, 2006. "Labor Market Frictions, Indeterminacy, and Interest Rate Rules," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(7), pages 1959-1970, October.
- Huang, Kevin X.D. & Meng, Qinglai, 2007.
"Capital and macroeconomic instability in a discrete-time model with forward-looking interest rate rules,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 31(8), pages 2802-2826, August.
- Kevin X. D. Huang & Qinglai Meng, 2007. "Capital and macroeconomic instability in a discrete-time model with forward-looking interest rate rules," Working Papers 07-4, Federal Reserve Bank of Philadelphia.
- Thomas Lubik & Michael Krause, 2003.
"The (Ir)relevance of Real Wage Rigidity in the New Keynesian Model with Search Frictions,"
Economics Working Paper Archive
504, The Johns Hopkins University,Department of Economics.
- Krause, Michael U. & Lubik, Thomas A., 2007. "The (ir)relevance of real wage rigidity in the New Keynesian model with search frictions," Journal of Monetary Economics, Elsevier, vol. 54(3), pages 706-727, April.
- Krause, M.U. & Lubik, T.A., 2003. "The (Ir)relevance of Real Wage Rigidity in the New Keynesian Model with Search Frictions," Discussion Paper 2003-113, Tilburg University, Center for Economic Research.
- Nessén, Marianne & Vestin, David, 2000.
"Average Inflation Targeting,"
Working Paper Series
119, Sveriges Riksbank (Central Bank of Sweden).
- Takushi Kurozumi & Willem Van Zandweghe, 2010.
"Labor market search, the Taylor principle, and indeterminacy,"
Research Working Paper
RWP 11-01, Federal Reserve Bank of Kansas City.
- Kurozumi, Takushi & Van Zandweghe, Willem, 2010. "Labor market search, the Taylor principle, and indeterminacy," Journal of Monetary Economics, Elsevier, vol. 57(7), pages 851-858, October.
- Lubik, Thomas A. & Schorfheide, Frank, 2003. "Computing sunspot equilibria in linear rational expectations models," Journal of Economic Dynamics and Control, Elsevier, vol. 28(2), pages 273-285, November.
- Kurozumi, Takushi & Van Zandweghe, Willem, 2008. "Investment, interest rate policy, and equilibrium stability," Journal of Economic Dynamics and Control, Elsevier, vol. 32(5), pages 1489-1516, May.
- Huang, Kevin X.D. & Meng, Qinglai & Xue, Jianpo, 2009.
"Is forward-looking inflation targeting destabilizing? The role of policy's response to current output under endogenous investment,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 33(2), pages 409-430, February.
- Kevin X.D. Huang & Qinglai Meng, 2007. "Is Forward-Looking Inflation Targeting Destabilizing? The Role of Policy's Response to Current Output under Endogenous Investment," Vanderbilt University Department of Economics Working Papers 0704, Vanderbilt University Department of Economics.
- 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.
When requesting a correction, please mention this item's handle: RePEc:fip:fedkrw:rwp10-15. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Lu Dayrit)
If references are entirely missing, you can add them using this form.