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Working Paper

Real Indeterminacy in Monetary Models with Nominal Interest Rate Distortions: The Problem with Inflation Targets

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.
09.01.1998ISSN 2573-7953 WP 98-18Revisions WP 98-18RDOI 10.26509/frbc-wp-199818

Working Papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views expressed in this paper are those of the authors and do not represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.

Suggested Citation

Carlstrom, Charles T., and Timothy S. 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. https://doi.org/10.26509/frbc-wp-199818