Indeterminancy from inflation forecast targeting: problem or pseudo-problem?

Bennett McCallum

Economic Quarterly, 2009, vol. 95, issue Win, 25-51

Abstract: Contemporary literature on monetary policy analysis concludes that use of an interest rate policy rule that responds to expected inflation in some future period may generate indeterminacy - a multiplicity of stable rational expectations (RE) solutions. By contrast, this article argues that in these analyses only one of the solutions possesses the property of learnability, which is necessary for the plausibility of any RE solution since its absence implies that there is no way for individuals to obtain enough information to form expectations that would support the solution in question. Thus indeterminacy of the type discussed is not an actual problem for actual policymakers.

Keywords: Interest rates; Inflation (Finance) (search for similar items in EconPapers)
Date: 2009
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