Liquidity Traps and the Price (In)Determinacy of Monetary Rules

Eagle, David M (2012): Liquidity Traps and the Price (In)Determinacy of Monetary Rules.

Abstract

This paper proposes a new methodology for assessing price indeterminacy to supplant the discredited nonexplosive criterion. Using this methodology, we find that nominal GDP targeting and price-level targeting do determine prices when the central bank follows a sufficiently strong feedback rule for setting the nominal interest rate. However, inflation targeting leads to price indeterminacy, a result consistent with the principles of calculus. This price indeterminacy of inflation targeting could manifest itself in a liquidity trap or zero bound for nominal interest rates rendering central banks impotent. Nominal GDP targeting could overcome this liquidity-trap effect.

• Item Type: MPRA Paper
• Language: English
• Keywords: inflation targeting, price-level targeting, nominal GDP inflation targeting, price-level targeting; nominal income targeting; price determinacy; liquidity trap
• Subjects: 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 > 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

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