The Eventual Failure and Price Indeterminacy of Inflation Targeting
In stark contrast to the previous literature, we find that IT leads to price indeterminacy even when the central bank uses a Taylor-like feedback rule to peg the nominal interest rate. We also find that there is no mechanism with IT to determine the current inflation rate or price level. We conclude that the previous literature has either committed mathematical errors involving infinity or misused the non-explosive criterion for ruling out speculative bubbles. To avoid making errors involving infinity, we analyze inflation targeting (IT) in a typical rational-expectations, pure-exchange, general-equilibrium model where the time horizon is arbitrarily large, but finite.
|Date of creation:||22 Nov 2006|
|Date of revision:||13 Dec 2006|
|Contact details of provider:|| Postal: Ludwigstraße 33, D-80539 Munich, Germany|
Web page: https://mpra.ub.uni-muenchen.de
More information through EDIRC
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.:
- Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
- Bennett McCallum, 1999.
"Role of the Minimal State Variable Criterion in Rational Expectations Models,"
International Tax and Public Finance,
Springer, vol. 6(4), pages 621-639, November.
- Bennett T. McCallum, . "Role of the minimal state variable criterion in rational expectations models," GSIA Working Papers 1999-13, Carnegie Mellon University, Tepper School of Business.
- 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.
- Carlstrom, Charles T. & Fuerst, Timothy S., 2001.
"Timing and real indeterminacy in monetary models,"
Journal of Monetary Economics,
Elsevier, vol. 47(2), pages 285-298, April.
- 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.
- Ovidiu L. Calin & Yu Chen & Thomas F. Cosimano & Alex A. Himonas, 2005. "Solving Asset Pricing Models when the Price-Dividend Function Is Analytic," Econometrica, Econometric Society, vol. 73(3), pages 961-982, 05.
When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:1240. 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: (Joachim Winter)
If references are entirely missing, you can add them using this form.