Performance of inflation targeting based on constant interest rate projections

S Honkapohja, K Mitra

    Research output: Contribution to journalArticlepeer-review

    16 Citations (Scopus)

    Abstract

    Monetary policy is sometimes formulated in terms of a target level of inflation, a fixed time horizon and a constant interest rate that is anticipated to achieve the target at the specified horizon. These requirements lead to constant interest rate (CIR) instrument rules. Using the standard New Keynesian model, it is shown that some forms of CIR policy lead to both indeterminacy of equilibria and instability under adaptive learning. However, some other forms of CIR policy perform better. We also examine the properties of the different policy rules in the presence of inertial demand and price behaviour. (c) 2004 Elsevier B.V. All rights reserved.

    Original languageEnglish
    Pages (from-to)1867-1892
    Number of pages26
    JournalJournal of Economic Dynamics and Control
    Volume29
    Issue number11
    DOIs
    Publication statusPublished - Nov 2005

    Keywords

    • indeterminacy
    • instability under learning
    • inflation targeting
    • inertia in demand
    • inflation inertia
    • MONETARY-POLICY
    • MODELS
    • EXPECTATIONS
    • PERSPECTIVE
    • RULES

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