Indeterminacy with inflation-forecast-based rules in a two-bloc model

Nicoletta Batini (), Paul Levine () and Joseph Gerson Pearlman ()

No 340, Working Paper Series from European Central Bank

Abstract: We examine the performance of forward-looking inflation-forecast-based rules in open economies. In a New Keynesian two-bloc model, a methodology first employed by Batini and Pearlman (2002) is used to obtain analytically the feedback parameters/horizon pairs associated with unique and stable equilibria. Three key findings emerge: first, indeterminacy occurs for any value of the feedback parameter on inflation if the forecast horizon lies too far into the future. Second, the problem of indeterminacy is intrinsically more serious in the open economy. Third, the problem is compounded further in the open economy when central banks respond to expected consumer, rather than producer price inflation.

Keywords: Taylor rules; inflation-forecast-based rules; indeterminacy; open economy. (search for similar items in EconPapers)
JEL-codes: E52 E37 E58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-for, nep-mac and nep-mon
Date: Written 2004-04
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Working Paper: Indeterminacy with inflation-forecast-based rules in a two-bloc model (2004)
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