Eagle, David (2006): The Eventual Failure and Price Indeterminacy of Inflation Targeting.
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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.
|Item Type:||MPRA Paper|
|Institution:||Eastern Washington University|
|Original Title:||The Eventual Failure and Price Indeterminacy of Inflation Targeting|
|Keywords:||inflation targeting; price determinacy; monetary policy; pegging interest rates; errors of infinity|
|Subjects:||E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E42 - Monetary Systems; Standards; Regimes; Government and the Monetary System; Payment Systems
E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy
E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies
|Depositing User:||David Eagle|
|Date Deposited:||22. Dec 2006|
|Last Modified:||21. Feb 2013 02:46|
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