Term Structure Targeting, Price Level Indeterminacy, and Taylor Rules

joint with Rafael Alejandro Paez Villate

This paper analyzes the conditions under which term structure targeting is able to uniquely determine the equilibrium path of prices in a stochastic setting. A set of sufficient conditions includes complete markets and monetary policy that adopts stationary targets for the entire term structure. When restricted to Taylor rules, in which the short-term interest rates are targeted as functions of the inflation rates, monetary policy is only able to implement price level determinacy for an extreme set of interest rate targets.

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