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GLOBAL STABILITY OF INFLATION TARGET POLICIES WITH ADAPTIVE AGENTS

Published online by Cambridge University Press:  25 May 2001

Gian-Italo Bischi  and
Ramon Marimon
Gian-Italo Bischi
Affiliation:
Istituto di Scienze Economiche, University of Urbino
Ramon Marimon
Affiliation:
Madrid Ministry of Science and Technology, European University Institute, Universitat Pompeu Fabra, CEPR, and NBER
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Abstract

We study a dynamic equilibrium model in which agents have adaptive expectations and monetary authorities pursue an inflation target. We show how alternative monetary stabilization policies become more effective when fiscal constraints on deficits are implemented, although they are not binding at the equilibrium target. In particular, we show that the inflation target equilibrium can be locally, or even globally, stable for a large class of adaptive learning schemes. We also compare alternative stabilization policies in terms of their stability properties. Commonly postulated conditional Taylor-type rules tend to be dominated by other rules, such as an unconditional Friedman type.

Keywords

Inflation TargetingAdaptive ExpectationsStabilityGlobal Dynamics
Type
ARTICLES
Information
Macroeconomic Dynamics , Volume 5 , Issue 02 , April 2001 , pp. 148 - 179
Copyright
© 2001 Cambridge University Press

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