Performance of Inflation Targeting Based on Constant Interest Rate Projections

Seppo Honkapohja and Kaushik Mitra

No 4126, CEPR Discussion Papers from Centre for Economic Policy Research

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. Some other forms of CIR policy perform better, however. 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: E32 E52 E61 (search for similar items in EconPapers)
Date: 2003-12
New Economics Papers: this item is included in nep-mac and nep-mon
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Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Performance of inflation targeting based on constant interest rate projections (2005)
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)
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