Eagle, David (2007): Revealing the naked truth behind price determinacy, infinite-horizon rational expectations, and inflation targeting.
This is the latest version of this item.
Download (180kB) | Preview
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|
|Original Title:||Revealing the naked truth behind price determinacy, infinite-horizon rational expectations, and inflation targeting|
|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
|Depositing User:||David Eagle|
|Date Deposited:||23. Feb 2007|
|Last Modified:||16. Feb 2013 22:10|
Altug, Sumru & Pamela Labadie (1994). Dynamic Choice and Asset Markets (Academic Press).
Blanchard, Olivier J. & Charles M. Kahn (1980), “The Solution of Linear Difference Models under Rational Expectations,” Econometrica, 48(#5):1305-1312.
Calin, Ovidue, Yu Chen, Thomas Cosimano, and Alex Himonas, (2005), “Solving Asset Pricing Models when the Price-Dividend Function is Analytic,” Econometrica 73(#3):961-982.
Carlstrom, Charles T. & Fuerst, Timothy S. (2001). "Timing and real indeterminacy in monetary models," Journal of Monetary Economics. 47(#2):285-298.
Carlstrom, Charles T. (2005). personal correspondence with author.
Cochrane, John (2006). “Identification and Price Determination with Taylor Rules: A Critical Review,” working paper, http://faculty.chicagogsb.edu/john.cochrane/research/Papers/inconsistency.pdf, accessed on January 17, 2007.
Dittmar, Robert D. and William T. Gavin (2005), “Inflation-Targeting, Price-Path Targeting and Indeterminacy,” Economic Letters 88:336-342.
Eagle, David (2005a). "Price Indeterminacy Reinvented: Pegging Interest Rates While Targeting Prices, Inflation, or Nominal Income," Macroeconomics 0501028, EconWPA database, http://ideas.repec.org/p/wpa/wuwpma/0501028.html, accessed on November 16, 2006.
__________ (2005b). "The Inflation Dynamics of Pegging Interest Rates," Macroeconomics 0502029, EconWPA database, http://ideas.repec.org/p/wpa/wuwpma/0502029.html, accessed on November 16, 2006.
__________ (2005c). "Multiple Critiques of Woodford’s Model of a Cashless Economy," Macroeconomics 0504028, EconWPA database, http://ideas.repec.org/p/wpa/wuwpma/0504028.html, accessed on November 16, 2006.
__________ (2007). "The Eventual Failure and Price Indeterminacy of Inflation Targeting," MPRA Paper 1240, University Library of Munich, Germany, accessed on January 19, 2007.
Eagle, David & Dale Domian, 2005. "Sounding the Alarm on Inflation Indexing and Strict Inflation Targeting," working paper, http://www.cbpa.ewu.edu/~deagle/banking/SOundingWEApaper.pdf, accessed on November 16, 2006.
Eagle, David & Elizabeth Murff, 2005. "Logical Pitfalls of Assuming Bounded Solutions to Expectational Difference Equations," GE, Growth, Math methods 0501002, EconWPA database, , accessed on November 16, 2006.
Lucas, Robert (1978), “Asset Prices in an Exchange Economy,” Econometrica 46(#6):1429-1445.
McCallum, Bennett T. (1981). “Price Level Determinacy with an Inteerst Rate Policy Rule and Rational Expectations,” Journal of Monetary Economics 8:319-329.
McCallum, Bennett (1999). “Role of the Minimal State Variable Criterion in Rational Expectations Models,” International Tax and Public Finance, 6:621–639.
Obstfelt, M. and K. Rogoff (1983). “Speculative Hyperinflations in Maximizing Models: Can We Rule Them Out?” Journal of Political Economy, 91(#4):675-687.
______________________(1986). “Ruling Out Divergent Speculative Bubbles,” Journal of Monetary Economics,” 17(#3):349-362.
Sargent, Thomas J. (1979). Macroeconomic Theory – Economic Theory, Econometrics, and Mathematical Economics (Academic Press – New York).
Sargent, Thomas J. and Neil Wallace (1975). “‘Rational’ Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule,” Journal of Political Economy 83:241-254.
Taylor, John B. (1993). "Discretion Versus Policy Rules in Practice," Carnegie-Rochester Conference Series on Public Policy, 39:195-214.
Woodford, Michael (2003). Interest and Prices – A Foundation of a Theory of Monetary Policy (Princeton University of Press – Princeton, New Jersey).
Available Versions of this Item
Revealing the naked truth behind price determinacy, infinite-horizon rational expectations, and inflation targeting. (deposited 20. Jan 2007)
- Revealing the naked truth behind price determinacy, infinite-horizon rational expectations, and inflation targeting. (deposited 23. Feb 2007) [Currently Displayed]