Indeterminacy from Inflation Forecast Targeting: Problem or Pseudo-Problem?

FRB Richmond Economic Quarterly, Vol. 95, No. 1, Winter 2009, pp. 25-51

27 Pages Posted: 13 Dec 2012

See all articles by Bennett T. McCallum

Bennett T. McCallum

Carnegie Mellon University - David A. Tepper School of Business; National Bureau of Economic Research (NBER)

Date Written: 2009

Abstract

Contemporary literature on monetary policy analysis concludes that use of an interest rate policy rule that responds to expected inflation in some future period may generate indeterminacy — a multiplicity of stable rational expectations (RE) solutions. By contrast, this article argues that in these analyses only one of the solutions possesses the property of learnability, which is necessary for the plausibility of any RE solution since its absence implies that there is no way for individuals to obtain enough information to form expectations that would support the solution in question. Thus indeterminacy of the type discussed is not an actual problem for actual policymakers.

Suggested Citation

McCallum, Bennett T., Indeterminacy from Inflation Forecast Targeting: Problem or Pseudo-Problem? (2009). FRB Richmond Economic Quarterly, Vol. 95, No. 1, Winter 2009, pp. 25-51, Available at SSRN: https://ssrn.com/abstract=2188489

Bennett T. McCallum (Contact Author)

Carnegie Mellon University - David A. Tepper School of Business ( email )

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