Real indeterminacy in monetary models with nominal interest rate distortions: the problem with inflation targets

Charles Carlstrom () and Timothy S. Fuerst ()

No 9818R, Working Paper from Federal Reserve Bank of Cleveland

Abstract: This paper demonstrates that in a standard monetary model with a cash-in-advance constraint on consumption there exists real indeterminacy whenever the nominal interest rate moves too closely with the real rate. A particular example of such a policy is an inflation rate target. This is not a knife-edge result. The conclusion is robust to a wide range of calibrations and to a monetary environment that allows for endogenous velocity.

Keywords: Monetary policy; Inflation (Finance) (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mon
Date: 2001
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Journal Article: Real Indeterminacy in Monetary Models with Nominal Interest Rate Distortions
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