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Abstract

At the turn of the century, Knut Wicksell proposed a monetary policy rule that has become conventional wisdom: raise interest rates when inflation is above target and vice versa. The authors discover some surprising properties of this rule. When the rule is included in a model in which inflation is driven by the short real rate, the model is unstable. When the rule is combined with a Phillips curve driven by a backward-looking long real rate, the model is unstable. However, when a forward-looking component is added to inflation or the long real rate, the policy stabilizes the rate of inflation. Copyright 1995 by Ohio State University Press.

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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 27 (1995)
Issue (Month): 4 (November)
Pages: 1060-70

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Handle: RePEc:mcb:jmoncb:v:27:y:1995:i:4:p:1060-70

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Cited by:

1. Nicoletta Batini & Andrew G Haldane, 1999. "Forward-looking rules for monetary policy," Bank of England working papers 91, Bank of England.
   
   • Nicoletta Batini & Andrew Haldane, 1999. "Forward-Looking Rules for Monetary Policy," NBER Chapters, in: Monetary Policy Rules, pages 157-202 National Bureau of Economic Research, Inc.
   • Andrew G. Haldane & Nicoletta Batini, 1998. "Forward-Looking Rules for Monetary Policy," NBER Working Papers 6543, National Bureau of Economic Research, Inc.
2. Woodford, M., 1997. "Doing Without Money: Controlling Inflation in a Post-Monetary World," Papers 632, Stockholm - International Economic Studies.
   
   • Michael Woodford, 1998. "Doing Without Money: Controlling Inflation in a Post-Monetary World," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(1), pages 173-219, January.
   • Woodford, Michael, 1997. "Doing Without Money: Controlling Inflation in a Post-Monetary World," Seminar Papers 632, Stockholm University, Institute for International Economic Studies.
   • Michael Woodford, 1997. "Doing Without Money: Controlling Inflation in a Post-Monetary World," NBER Working Papers 6188, National Bureau of Economic Research, Inc.
3. Athanasios Orphanides & John C. Williams, 2002. "Robust Monetary Policy Rules with Unknown Natural Rates," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 33(2), pages 63-146.
   
   • Athanasios Orphanides & John C. Williams, 2002. "Robust monetary policy rules with unknown natural rates," Working Papers in Applied Economic Theory 2003-01, Federal Reserve Bank of San Francisco.
   • Athanasios Orphanides & John C. Williams, 2003. "Robust monetary policy rules with unknown natural rates," Finance and Economics Discussion Series 2003-11, Board of Governors of the Federal Reserve System (U.S.).
4. Athanasios Orphanides & John C. Williams, 2006. "Inflation Targeting Under Imperfect Knowledge," Working Papers Central Bank of Chile 398, Central Bank of Chile.
   
   • Athanasios Orphanides & John C. Williams, 2007. "Inflation Targeting under Imperfect Knowledge," Central Banking, Analysis, and Economic Policies Book Series, in: Frederic S. Miskin & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Se (ed.), Monetary Policy under Inflation Targeting, edition 1, volume 11, chapter 4, pages 077-123 Central Bank of Chile.
   • Athanasios Orphanides & John C. Williams, 2007. "Inflation targeting under imperfect knowledge," Economic Review, Federal Reserve Bank of San Francisco, pages 1-23.
   • Orphanides, Athanasios & Williams, John C, 2006. "Inflation Targeting under Imperfect Knowledge," CEPR Discussion Papers 5664, C.E.P.R. Discussion Papers.
   • Athanasios Orphanides & John C. Williams, 2006. "Inflation targeting under imperfect knowledge," Working Paper Series 2006-14, Federal Reserve Bank of San Francisco.
   • Athanasios Orphanides & John C. Williams, 2006. "Inflation Targeting under Imperfect Knowledge," Computing in Economics and Finance 2006 38, Society for Computational Economics.
   • Athanasios Orphanides & John C. Williams, 2006. "Inflation targeting under imperfect knowledge," Finance and Economics Discussion Series 2006-20, Board of Governors of the Federal Reserve System (U.S.).
5. Pau Rabanal & Juan F. Rubio-Ramirez, 2003. "Inflation persistence: how much can we explain?," Economic Review, Federal Reserve Bank of Atlanta, issue Q2, pages 43-55.
6. Michał Brzoza-Brzezina, 2002. "Estimating the Natural Rate of Interest: A SVAR Approach," National Bank of Poland Working Papers 27, National Bank of Poland, Economic Institute.
   
   • Michal Brzoza-Brzezina, 2003. "Estimating the Natural Rate of Interest: A SVAR Approach," Macroeconomics 0301008, EconWPA.
7. Oreste Tristani, 2007. "Model misspecification, the equilibrium natural interest rate and the equity premium," Working Paper Series 808, European Central Bank.
   
   • Oreste Tristani, 2009. "Model Misspecification, the Equilibrium Natural Interest Rate, and the Equity Premium," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(7), pages 1453-1479, October.
8. Zakaria Babutsidze, 2012. "Asymmetric (S,s) Pricing: Implications for Monetary Policy," Revue de l'OFCE, Presses de Sciences-Po, vol. 0(5), pages 177-204.

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