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: By presenting two examples where the non-exploding criterion fails miserably, we demonstrate that that criterion does not universally apply. Therefore, by normal academic standards and burdens of proof, the previous price-determinacy literature has the burden to prove that the non-explosive criterion does apply to their models. However, that literature has not met and probably cannot meet that burden. Instead of using the non-explosive criterion, 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: E58 E52 E42 E31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-mon
Date: 2007-01-18, Revised 2007-02-22
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http://mpra.ub.uni-muenchen.de/1538/ orginal version
http://mpra.ub.uni-muenchen.de/1885/ revised version

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

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