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

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  • 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.

Suggested Citation

  • David Eagle, 2005. "Price Indeterminacy Reinvented: Pegging Interest Rates While Targeting Prices, Inflation, or Nominal Income," Macroeconomics 0501028, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpma:0501028
    Note: Type of Document - pdf; pages: 30
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    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/mac/papers/0501/0501028.pdf
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    References listed on IDEAS

    as
    1. 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 241-254, April.
    2. 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.
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    Cited by:

    1. David Eagle, 2005. "Multiple Critiques of Woodford’s Model of a Cashless Economy," Macroeconomics 0504028, University Library of Munich, Germany.
    2. David Eagle, 2005. "The Inflation Dynamics of Pegging Interest Rates," Macroeconomics 0502029, University Library of Munich, Germany.

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    • E - Macroeconomics and Monetary Economics

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