Performance of Inflation Targeting Based On Constant Interest Rate Projections

Seppo Mikko Sakari Honkapohja () and Kaushik Mitra ()

No 2003/39, CFS Working Paper Series from Center for Financial Studies

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.

Keywords: Indeterminacy; instability under learning; inflation targeting; inertia in demand; inflation inertia (search for similar items in EconPapers)
JEL-codes: E52 E61 E32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-mon
Date: Written 2003-02-08
Note: An earlier version was presented at the research conference "Expectations, Learning and Monetary Policy" August 2003 sponsored by the Deutsche Bundesbank, the Journal of Economic Dynamics and Control (JEDC) and the Center for Financial Studies (CFS). We thank Paul Mizen for helpful discussions, which led to this paper. We also thank Giuseppe Ferrero, Charles Goodhart, Athanasios Orphanides, Lars Svensson and Anders Vredin for useful comments. Support from the Academy of Finland, Bank of Finland, Yrjö Jahnsson Foundation and Nokia Group is gratefully acknowledged.
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Related works:
Working Paper: Performance of Inflation Targeting Based On Constant Interest Rate Projections (2004)
Working Paper: Performance of Inflation Targeting Based on constant Interest Rate Projections (2004)
Working Paper: Performance of Inflation Targeting Based on Constant Interest Rate Projections (2004)
Working Paper: Performance of Inflation Targeting Based on Constant Interest Rate Projections (2003)
Journal Article: Performance of inflation targeting based on constant interest rate projections (2005)
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