TY  - JOUR
AU  - McCallum,Bennett T.
TI  - Inflation Targeting and the Liquidity Trap
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 8225
PY  - 2001
Y2  - April 2001
UR  - http://www.nber.org/papers/w8225
L1  - http://www.nber.org/papers/w8225.pdf
N1  - Author contact info:
Bennett T. McCallum
Tepper School of Business, Posner 256
Carnegie Mellon University
Pittsburgh, PA 15213
Tel: 412/268-2347
Fax: 412/268-6830
E-Mail: bm05@andrew.cmu.edu
AB  - This paper considers whether 'liquidity trap' issues have important bearing on the desirability of inflation targeting as a strategy for monetary policy.  From a theoretical perspective, it has been suggested that 'expectation trap' and 'indeterminacy' dangers are created by variants of inflation targeting, the latter when forecasts of future inflation enter the policy rule. This paper argues that these alleged dangers are probably not of practical importance.  From an empirical perspective, a quantitative open-economy model is developed and the likelihood of encountering a liquidity trap is explored for several policy rules.  Also, it is emphasized that, if the usual interest rate instrument is immobilized by a liquidity trap, there is still an exchange-rate channel by means of which monetary policy can exert stabilizing effects.  The relevant target variable can still be the inflation rate.
ER  -