The Eventual Failure and Price Indeterminacy of Inflation Targeting

David Eagle

MPRA Paper from University Library of Munich, Germany

Abstract: In stark contrast to the previous literature, we find that IT leads to price indeterminacy even when the central bank uses a Taylor-like feedback rule to peg the nominal interest rate. We also find that there is no mechanism with IT to determine the current inflation rate or price level. We conclude that the previous literature has either committed mathematical errors involving infinity or misused the non-explosive criterion for ruling out speculative bubbles. To avoid making errors involving infinity, we analyze inflation targeting (IT) in a typical rational-expectations, pure-exchange, general-equilibrium model where the time horizon is arbitrarily large, but finite.

Keywords: inflation targeting; price determinacy; monetary policy; pegging interest rates; errors of infinity (search for similar items in EconPapers)
JEL-codes: E42 E52 E58 (search for similar items in EconPapers)
Date: 2006-11-22, Revised 2006-12-13
New Economics Papers: this item is included in nep-mac and nep-mon
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https://mpra.ub.uni-muenchen.de/1883/1/MPRA_paper_1883.pdf revised version (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:1240

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