Performance of Inflation Targeting Based on Constant Interest Rate Projections

36 Pages Posted: 20 Dec 2003

See all articles by Seppo Honkapohja

Seppo Honkapohja

Centre for Economic Policy Research (CEPR); Aalto University School of Business; CESifo (Center for Economic Studies and Ifo Institute for Economic Research); Aalto University - School of Business

Kaushik Mitra

University of St. Andrews - School of Economics and Finance

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Date Written: October 12, 2003

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. However, some other forms of CIR policy perform better. 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

JEL Classification: E52, E61, E32

Suggested Citation

Honkapohja, Seppo and Honkapohja, Seppo and Mitra, Kaushik, Performance of Inflation Targeting Based on Constant Interest Rate Projections (October 12, 2003). Available at SSRN: https://ssrn.com/abstract=477822 or http://dx.doi.org/10.2139/ssrn.477822

Seppo Honkapohja (Contact Author)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Aalto University School of Business ( email )

, PO Box 21210
Aalto FI-00076
Finland

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Aalto University - School of Business

Finland

Kaushik Mitra

University of St. Andrews - School of Economics and Finance ( email )

Castlecliffe
Saint Andrews, Fife KY16 9SS
United Kingdom