Liquidity Traps and the Price (In)Determinacy of Monetary Rules

David Eagle

MPRA Paper from University Library of Munich, Germany

Abstract: This paper proposes a new methodology for assessing price indeterminacy to supplant the discredited nonexplosive criterion. Using this methodology, we find that nominal GDP targeting and price-level targeting do determine prices when the central bank follows a sufficiently strong feedback rule for setting the nominal interest rate. However, inflation targeting leads to price indeterminacy, a result consistent with the principles of calculus. This price indeterminacy of inflation targeting could manifest itself in a liquidity trap or zero bound for nominal interest rates rendering central banks impotent. Nominal GDP targeting could overcome this liquidity-trap effect.

Keywords: inflation targeting, price-level targeting, nominal GDP inflation targeting, price-level targeting; nominal income targeting; price determinacy; liquidity trap (search for similar items in EconPapers)
JEL-codes: E31 E52 E58 (search for similar items in EconPapers)
Date: 2012-11-02
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:42416

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