Indeterminacy with Inflation-Forecast-Based Rules in a Two-Bloc Model

67 Pages Posted: 25 Aug 2004

See all articles by Nicoletta Batini

Nicoletta Batini

International Monetary Fund (IMF)

Paul Levine

School of Economics, University of Surrey

Joseph Pearlman

London Metropolitan University - Department of Economics, Finance and International Business (EFIB)

Multiple version iconThere are 2 versions of this paper

Date Written: April 2004

Abstract

We examine the performance of forward-looking inflation-forecast-based rules in open economies. In a New Keynesian two-bloc model, a methodology first employed by Batini and Pearlman (2002) is used to obtain analytically the feedback parameters/horizon pairs associated with unique and stable equilibria. Three key findings emerge: first, indeterminacy occurs for any value of the feedback parameter on inflation if the forecast horizon lies too far into the future. Second, the problem of indeterminacy is intrinsically more serious in the open economy. Third, the problem is compounded further in the open economy when central banks respond to expected consumer, rather than producer price inflation.

Keywords: Taylor rules, inflation-forecast-based rules, indeterminacy, open economy

JEL Classification: E52, E37, E58

Suggested Citation

Batini, Nicoletta and Levine, Paul L. and Pearlman, Joseph G., Indeterminacy with Inflation-Forecast-Based Rules in a Two-Bloc Model (April 2004). ECB Working Paper No. 340. Available at SSRN: https://ssrn.com/abstract=532983

Nicoletta Batini (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Paul L. Levine

School of Economics, University of Surrey ( email )

Guildford
Surrey GU2 7XH
United Kingdom
+44 1483 259 380 Ext. 2773 (Phone)
+44 1483 259 548 (Fax)

Joseph G. Pearlman

London Metropolitan University - Department of Economics, Finance and International Business (EFIB) ( email )

Economics Subject Group, LMBS
London EC2M 6SQ, EC2M 6SQ
United Kingdom

Register to save articles to
your library

Register

Paper statistics

Downloads
53
Abstract Views
941
rank
220,672
PlumX Metrics