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Federal Reserve Bank of Cleveland
Working Papers (Old Series)
Real indeterminacy in monetary models with nominal interest rate distortions: the problem with inflation targets
Charles T. Carlstrom
Timothy S. Fuerst
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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Charles T. Carlstrom & Timothy S. Fuerst, Real indeterminacy in monetary models with nominal interest rate distortions: the problem with inflation targets, Federal Reserve Bank of Cleveland, Working Papers (Old Series) 9818R, 2001.
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Keywords: Monetary policy ; Inflation (Finance)
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