Overview
We consider monetary-policy rules with inflation-rate targets and interest-rate or money-growth instruments using a flexible-price, perfect-foresight model. There is always a locally-unique target equilibrium. There may also be below-target equilibria (BTE) with inflation always below target and constant, asymptotically approaching or eventually reaching a below-target value, or oscillating. Liquidity traps are neither necessary nor sufficient for BTE which can arise if monetary policy keeps the interest rate above a lower bound. We construct monetary rules that preclude BTE when fiscal policy does not. Plausible fiscal policies preclude BTE for any monetary policy; those policies exclude surpluses and, possibly, balanced budgets.
- | Author: Ragna Alstadheim
- | Publisher: Bibliogov
- | Publication Date: Feb 08, 2013
- | Number of Pages: 34 pages
- | Binding: Paperback or Softback
- | ISBN-10: 1288728689
- | ISBN-13: 9781288728688
