Abstract
This paper studies the challenge that increasing the inflation target poses to equilibrium determinacy in a mediumsized 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.
Authors
- Jonas E. Arias
- Guido Ascari
- Nicola Branzoli
- Efrem Castelnuovo
JEL codes
- E52
- E3
- C22