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Title: Performance of Inflation Targeting Based on Constant Interest Rate Projections

Author(s): Seppo Honkapohja and Kaushik Mitra

Publication Date: December 2003

Keyword(s): indeterminacy, inertia in demand, inflation inertia, inflation targeting and instability under learning

Programme Area(s): International Macroeconomics

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.

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Bibliographic Reference

Honkapohja, S and Mitra, K. 2003. 'Performance of Inflation Targeting Based on Constant Interest Rate Projections'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=4126