Open Daily: 10am - 10pm | Alley door pickup 10am - 7pm 3038 Hennepin Ave Minneapolis, MN
612-822-4611

  • Open Daily: 10am - 10pm
    Alley-side Pickup: 10am - 7pm

    3038 Hennepin Ave Minneapolis, MN
    612-822-4611

Open Daily: 10am - 10pm | Alley-side Pickup: 10am - 7pm
3038 Hennepin Ave Minneapolis, MN
612-822-4611
Inflation-Forecast-Based Rules and Indeterminacy: A Puzzle and a Resolution

Inflation-Forecast-Based Rules and Indeterminacy: A Puzzle and a Resolution

Levine, Paul
McAdam, Peter
International Journal of Central Banking

Paperback

General Political Science

ISBN10: 1249560381
ISBN13: 9781249560388
Publisher: Bibliogov
Published: Sep 27 2012
Pages: 38
Weight: 0.19
Height: 0.08 Width: 7.44 Depth: 9.69
Language: English
We examine an interesting puzzle in monetary economics between what monetary authorities claim (namely, to be forward looking and preemptive) 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 that 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, 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 dynamic stochastic general equilibrium (DSGE) model of the euro area.

Also in

General Political Science

View All