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The Advantage of Flexible Targeting Rules



  • I thank to the editor (Ken West) and two anonymous referees for several criticisms and suggestions. I am grateful to Pierpaolo Benigno for encouraging me to look into many of the issues discussed in this paper, and to Stefano Eusepi, Marc Giannoni, and Eric Leeper for useful conversations. I have also benefited from comments by seminar participants at IMT Lucca, Midwest Macroeconomics Meetings (Indiana), European Meetings of the Econometric Society (Barcelona), and Computing in Economics and Finance (London). The usual disclaimers apply. The views expressed herein do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System.

Andrea Ferrero is an Economist, Federal Reserve Bank of New York, Macroeconomics and Monetary Studies Function—Research and Statistics Group (E-mail:


This paper investigates the consequences of debt stabilization for inflation targeting. If the fiscal authority holds constant the real value of debt at maturity under strict inflation targeting, the equilibrium dynamics are indeterminate for a wide range of parameters and steady-state fiscal stances. “Flexible” targeting rules that include a concern for stabilization of the output gap can restore determinacy of the equilibrium. Flexible inflation targeting appears to be more robust than flexible debt targeting to alternative parameterizations. The fiscal authority can prevent indeterminacy under strict targeting rules by committing to hold constant debt net of interest rate spending.