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

David Eagle

MPRA Paper from University Library of Munich, Germany

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.

Keywords: non-explosive criterion; price determinacy; inflation targeting; stability criterion; saddle-point criterion; infinite-horizon economies; pegging the interest rate (search for similar items in EconPapers)
JEL-codes: E31 E42 E52 E58 (search for similar items in EconPapers)
Date: 2007-01-18
New Economics Papers: this item is included in nep-mac and nep-mon
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https://mpra.ub.uni-muenchen.de/1885/1/MPRA_paper_1885.pdf revised version (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:1538

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