June 2020 issue contents
Positive Trend Inflation and Determinacy in a Medium-Sized New Keynesian Model

Jonas E. Arias^a, Guido Ascari^b, Nicola Branzoli^c, and Efrem Castelnuovo^d

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.

JEL Code: E52, E3, C22.

 
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