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

By presenting two examples where the non-exploding criterion fails miserably, we demonstrate that that criterion does not universally apply. Therefore, by normal academic standards and burdens of proof, the previous price-determinacy literature has the burden to prove that the non-explosive criterion does apply to their models. However, that literature has not met and probably cannot meet that burden. Instead of using the non-explosive criterion, 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 > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies; 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 > 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

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