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Performance of inflation targeting based on constant interest rate projections

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

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Paper provided by Center for Financial Studies (CFS) in its series CFS Working Paper Series with number 2003/39.

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Date of creation: 2003
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Handle: RePEc:zbw:cfswop:200339
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  7. Svensson, Lars E.O., 1998. "Inflation Targeting as a Monetary Policy Rule," Seminar Papers 646, Stockholm University, Institute for International Economic Studies.
  8. anonymous, 2005. "Monetary policy report to the Congress," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Spr, pages 117-142.
  9. Preston, Bruce, 2005. "Learning about Monetary Policy Rules when Long-Horizon Expectations Matter," MPRA Paper 830, University Library of Munich, Germany.
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  14. George W. Evans & Seppo Honkapohja, 2002. "Adaptive Learning and Monetary Policy Design," University of Oregon Economics Department Working Papers 2002-18, University of Oregon Economics Department, revised 04 Mar 2004.
  15. Kaushik Mitra & James Bullard, 2004. "Determinacy, Learnability, and Monetary Policy Inertia," Royal Holloway, University of London: Discussion Papers in Economics 04/14, Department of Economics, Royal Holloway University of London, revised Jul 2004.
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