The authors are grateful to the editor Pok-sang Lam, the associate editor Thomas Lubik, Bennett McCallum, two anonymous referees, and seminar participants at the Federal Reserve Bank of Kansas City for valuable comments and suggestions. Any remaining errors are the sole responsibility of the authors. The views expressed herein are those of the authors and should not be interpreted as those of the Bank of Japan, the Federal Reserve Bank of Kansas City, or the Federal Reserve System.
Determinacy under Inflation Targeting Interest Rate Policy in a Sticky Price Model with Investment (and Labor Bargaining)
Article first published online: 20 JUL 2011
© 2011 The Ohio State University
Journal of Money, Credit and Banking
Volume 43, Issue 5, pages 1019–1033, August 2011
How to Cite
KUROZUMI, T. and VAN ZANDWEGHE, W. (2011), Determinacy under Inflation Targeting Interest Rate Policy in a Sticky Price Model with Investment (and Labor Bargaining). Journal of Money, Credit and Banking, 43: 1019–1033. doi: 10.1111/j.1538-4616.2011.00405.x
- Issue published online: 20 JUL 2011
- Article first published online: 20 JUL 2011
- Received October 27, 2006; and accepted in revised form January 10, 2011.
- inflation targeting interest rate policy;
- indeterminacy of equilibrium;
- cost channel of monetary policy;
- labor bargaining
In a sticky price model with investment spending, recent research shows that inflation-forecast targeting interest rate policy makes determinacy of equilibrium essentially impossible. We examine a necessary and sufficient condition for determinacy under interest rate policy that responds to a weighted average of an inflation forecast and current inflation. This condition demonstrates that the average-inflation targeting policy ensures determinacy as long as both the response to average inflation and the relative weight of current inflation are large enough. We also find that interest rate policy that responds solely to past inflation guarantees determinacy when its response satisfies the Taylor principle and is not large. These results still hold even when wages and hours worked are determined by Nash bargaining.