Inflation forecast-based-rules and indeterminacy: a puzzle and a resolution
Peter McAdam (),
Paul Levine () and
Joseph Pearlman
No 643, Working Paper Series from European Central Bank
Abstract:
We examine an interesting puzzle in monetary economics between what monetary authorities claim (namely to be forward-looking and pre-emptive) and the poor stabilization properties routinely reported for forecast-based rules. Our resolution is that central banks should be viewed as following 'Calvo-type' inflation-forecast-based (IFB) interest rate rules which depend on a discounted sum of current and future rates of inflation. Such rules might be regarded as both within the legal frameworks, and potentially mimicking central bankers' practice. We find that Calvo-type IFB interest rate rules are first: less prone to indeterminacy than standard rules with a finite forward horizon. Second, for such rules in difference form, the indeterminacy problem disappears altogether. Third, optimized forms have good stabilization properties as they become more forward-looking, a property that sharply contrasts that of standard IFB rules. Fourth, they appear data coherent when incorporated into a well-known estimated DSGE model of the Euro-area. JEL Classification: E52, E37, E58
Keywords: Calvo-type interest rate rules; indeterminacy; Inflation-forecast-based interest rate rules (search for similar items in EconPapers)
Date: 2006-06
Note: 50336
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)
Downloads: (external link)
https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp643.pdf (application/pdf)
Related works:
Journal Article: Inflation-Forecast-Based Rules and Indeterminacy: A Puzzle and a Resolution (2007) 
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:2006643
Access Statistics for this paper
More papers in Working Paper Series from European Central Bank 60640 Frankfurt am Main, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Official Publications ().