Revealing the naked truth behind price determinacy, infinite-horizon rational expectations, and inflation targeting

Eagle, David (2007): Revealing the naked truth behind price determinacy, infinite-horizon rational expectations, and inflation targeting.

Abstract

The economic profession should demand that that price-determinacy literature adhere to normal academic standards and burdens of proof. By presenting two examples where the non-exploding criterion fails miserably, we demonstrate that that criterion does not universally apply. Therefore, the previous price-determinacy literature has the burden to prove that the non-explosive criterion does apply, but has not met and probably cannot meet that burden. This paper looks at an economy with an arbitrarily large, but finite horizon and concludes that inflation targeting leads to price indeterminacy even with a Taylor-like feedback rule for setting the nominal interest rate.

• Item Type: MPRA Paper
• Institution: Eastern Washington University
• Language: English
• Keywords: non-explosive criterion; price determinacy; inflation targeting; stability criterion; saddle-point criterion; infinite-horizon economies; pegging the interest rate
• 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 > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; 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

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