Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/181322 
Year of Publication: 
2018
Series/Report no.: 
CESifo Working Paper No. 7122
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
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. 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.
Subjects: 
trend inflation
determinacy
monetary policy
JEL: 
E52
E30
C22
Document Type: 
Working Paper
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