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Constant-Interest-Rate Projections and Its Indicator Properties

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  • Christian Bustamante

    ()

  • Luis E. Rojas

    ()

Abstract

This paper propose indicator variables for the implementation of monetary policy in an inflation targeting regime. Using constant interest rate projections, the notion of a target-compatible interest rate is presented. This variable allows to extract some characteristics that the expected future path of the interest rate have to fulfill in order to be compatible with the target. The specific formulation of the target-compatible interest rate is presented under alternative assumptions over the forecasting horizon (unconditional or conditional forecasts) and the objective of the monetary authority (inflation target or a loss function). The empirical counterpart of the various formulations is shown using a DSGE model for Colombia; a small open economy with an inflation targeting regime.

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Bibliographic Info

Paper provided by Banco de la Republica de Colombia in its series Borradores de Economia with number 696.

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Length: 24
Date of creation: Mar 2012
Date of revision:
Handle: RePEc:bdr:borrec:696

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Keywords: Monetary policy; constant-interest-rate projections; modest policy interventions; inflation targeting. Classification JEL: E37; E47; E52.;

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  1. Malin Adolfson & Stefan Laséen & Jesper Lindé & Mattias Villani, 2005. "Are Constant Interest Rate Forecasts Modest Policy Interventions? Evidence from a Dynamic Open-Economy Model," International Finance, Wiley Blackwell, Wiley Blackwell, vol. 8(3), pages 509-544, December.
  2. Thomas Laubach & John C. Williams, 2003. "Measuring the Natural Rate of Interest," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 1063-1070, November.
  3. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, Elsevier, vol. 12(3), pages 383-398, September.
  4. Giammarioli, Nicola & Valla, Natacha, 2003. "The natural real rate of interest in the euro area," Working Paper Series, European Central Bank 0233, European Central Bank.
  5. Andrew Levin & Christopher J. Erceg & Dale W. Henderson, 1999. "Optimal Monetary Policy with Staggered Wage and Price Contracts," Computing in Economics and Finance 1999, Society for Computational Economics 1151, Society for Computational Economics.
  6. Frank Smets & Raf Wouters, 2007. "Shocks and Frictions in US Business Cycles : a Bayesian DSGE Approach," Working Paper Research, National Bank of Belgium 109, National Bank of Belgium.
  7. Eliana González & Luis F. Melo & Luis E. Rojas & Brayan Rojas, 2010. "Estimations of the natural rate of interest in Colombia," BORRADORES DE ECONOMIA 007667, BANCO DE LA REPÚBLICA.
  8. Eric M. Leeper & Tao Zha, 1999. "Modest policy interventions," Working Paper, Federal Reserve Bank of Atlanta 99-22, Federal Reserve Bank of Atlanta.
  9. Leitemo, Kai, 2003. " Targeting Inflation by Constant-Interest-Rate Forecasts," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 35(4), pages 609-26, August.
  10. Jesús Cuaresma & Ernest Gnan & Doris Ritzberger-Gruenwald, 2004. "Searching for the natural rate of interest: a euro area perspective," Economic Change and Restructuring, Springer, Springer, vol. 31(2), pages 185-204, June.
  11. Paul Castillo & Carlos Montoro & Vicente Tuesta, 2006. "Measuring the Natural Interest Rate for the Peruvian Economy," Working Papers, Banco Central de Reserva del Perú 2006-003, Banco Central de Reserva del Perú.
  12. Schmitt-Grohé, Stephanie & Uribe, Martín, 2002. "Closing Small Open Economy Models," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3096, C.E.P.R. Discussion Papers.
  13. Miles S. Kimball & Michael Woodford, 1994. "The quantitative analysis of the basic neomonetarist model," Proceedings, Federal Reserve Bank of Cleveland, Federal Reserve Bank of Cleveland, pages 1241-1289.
  14. Jesus Crespo Cuaresma & Ernest Gnan & Doris Ritzberger-Grünwald, 2003. "Searching for the Natural Rate of Interest: a Euro-Area Perspective," Working Papers, Oesterreichische Nationalbank (Austrian Central Bank) 84, Oesterreichische Nationalbank (Austrian Central Bank).
  15. Juan José Echavarría & Enrique López Enciso & Martha Misas Arango & Juana Tellez Corredor, 2006. "La Tasa de Interés Natural en Colombia," BORRADORES DE ECONOMIA 003088, BANCO DE LA REPÚBLICA.
  16. Neiss, Katharine S. & Nelson, Edward, 2003. "The Real-Interest-Rate Gap As An Inflation Indicator," Macroeconomic Dynamics, Cambridge University Press, Cambridge University Press, vol. 7(02), pages 239-262, April.
  17. Carlos A. Huertas & Munir Jalil & Sergio Olarte & José Vicente Romero, 2005. "Algunas Consideraciones Sobre El Canal Del Crédito Y La Transmisión De Tasas De Interés En Colombia," BORRADORES DE ECONOMIA 001962, BANCO DE LA REPÚBLICA.
  18. Jens D J Larsen & Jack McKeown, 2004. "The informational content of empirical measures of real interest rate and output gaps for the United Kingdom," Bank of England working papers, Bank of England 224, Bank of England.
  19. Bomfim, Antulio N, 1997. "The Equilibrium Fed Funds Rate and the Indicator Properties of Term-Structure Spreads," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 35(4), pages 830-46, October.
  20. Charles Goodhart, 2009. "The Interest Rate Conditioning Assumption," International Journal of Central Banking, International Journal of Central Banking, International Journal of Central Banking, vol. 5(2), pages 85-108, June.
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