POSITIVE TREND INFLATION AND DETERMINACY IN A MEDIUM-SIZED NEW KEYNESIAN MODEL
Abstract: This paper studies the challenge that increasing the inflation target poses to equilibrium determinacy in a medium-sized New Keynesian model without indexation fitted to the Great Moderation era. For moderate targets of the inflation rate, such as 2 or 4 percent, the probability of determinacy is near one conditional on the monetary policy rule of the estimated model. However, this probability drops significantly conditional on model-free estimates of the monetary policy rule based on real-time data. The difference is driven by the larger response of the federal funds rate to the output gap associated with the latter estimates.
File(s): File format is application/pdf https://www.philadelphiafed.org/-/media/frbp/assets/working-papers/2017/wp17-16.pdf
Provider: Federal Reserve Bank of Philadelphia
Part of Series: Working Papers
Publication Date: 2017-06-21
Pages: 34 pages