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.
View the Full Working Paper![Row of columns wish square pedestals](/-/media/frbp/assets/images/content/the-economy/monitary-policy/square-columns/subsectionbanner-square-columns.jpg)
Working Paper
Positive Trend Inflation and Determinacy in a Medium-Sized New Keynesian Model
June 2017
WP 17-16 - 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.
Share
Download