Real Indeterminacy in Monetary Models with Nominal Interest Rate Distortions: The Problem with Inflation Targets
|WP 98-18||Revisions: WP 98-18R|
This paper demonstrates that in a standard monetary model there exists real indeterminacy whenever the nominal interest rate moves too closely with the real rate. A particular example of such a policy is if the central bank were to target the inflation rate. This is not a knife-edge result. The conclusion is robust to (1) a wide range of calibrations, (2) a more general monetary policy that targets a varying path for the inflation rate, and (3) a monetary environment that allows for endogenous velocity.
Suggested citation: Carlstrom, Charles, and Timothy Fuerst, 1998. “Real Indeterminacy in Monetary Models with Nominal Interest Rate Distortions: The Problem with Inflation Targets,” Federal Reserve Bank of Cleveland, Working Paper, no. 98-18.