Efficiency and determinacy of equilibrium under inflation targeting

Abstract

There is increasing interest in conducting monetary policy so as to achieve a given target inflation rate (or price level path). Several policies that have been advocated for this purpose are evaluated on the following criteria: (a) are they consistent with the existence of an equilibrium for a variety of targets? (b) do they support only equilibria with the desired price level behavior, or are other equilibria also possible? (c) even if only the desired price level path is possible, are indeterminacies avoided on other dimensions? (d) if there is a unique equilibrium, does it support an allocation that can be Pareto dominated in equilibrium by an alternative policy mechanism? None of the policies examined performs well on the basis of all these criteria.