Real indeterminacy in monetary models with nominal interest rate distortions: the problem with inflation targets
Abstract: This paper demonstrates that in a standard monetary model with a cash-in-advance constraint on consumption there exists real indeterminacy whenever the nominal interest rate moves too closely with the real rate. A particular example of such a policy is an inflation rate target. This is not a knife-edge result. The conclusion is robust to a wide range of calibrations and to a monetary environment that allows for endogenous velocity.
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Description: Full text
Provider: Federal Reserve Bank of Cleveland
Part of Series: Working Papers (Old Series)
Publication Date: 2001