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Fixed interest rates over finite horizons

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  • Blake, Andrew

    ()
    (Bank of England)

Abstract

We consider finite horizon conditioning paths for nominal interest rates in New Keynesian monetary policy models. This is done two ways. First, we develop a simple way to use policy interventions in the form of interest rate shocks to achieve the conditioning path and show this yields a unique solution. We then modify this method to generate an infinity of solutions making the model better behaved but effectively indeterminate. Second, we use two-part rules where a specially designed targeting rule generates fixed interest rates endogenously over the initial period before reverting to a more conventional instrument rule. We show that the two approaches are equivalent. We discuss appropriate selection criteria over the resulting equilibria.

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Bibliographic Info

Paper provided by Bank of England in its series Bank of England working papers with number 454.

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Length: 39 pages
Date of creation: 18 May 2012
Date of revision:
Handle: RePEc:boe:boeewp:0454

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Keywords: Fixed nominal interest rates; uniqueness; indeterminacy;

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References

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  1. Leeper, Eric M. & Zha, Tao, 2003. "Modest policy interventions," Journal of Monetary Economics, Elsevier, vol. 50(8), pages 1673-1700, November.
  2. Daniel F. Waggoner & Tao Zha, 1999. "Conditional Forecasts In Dynamic Multivariate Models," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 639-651, November.
  3. GalĂ­, Jordi, 2011. "Are central banks' projections meaningful?," Journal of Monetary Economics, Elsevier, vol. 58(6), pages 537-550.
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Cited by:
  1. Charles T. Carlstrom & Timothy S. Fuerst & Matthius Paustian, 2012. "How inflationary is an extended period of low interest rates?," Working Paper 1202, Federal Reserve Bank of Cleveland.
  2. Charles T Carlstrom & Timothy S Fuerst & Matthius Paustian, 2012. "Inflation and output in New Keynesian models with a transient interest rate peg," Working Paper 1234, Federal Reserve Bank of Cleveland.
  3. Marco Del Negro & Frank Schorfheide, 2012. "DSGE model-based forecasting," Staff Reports 554, Federal Reserve Bank of New York.

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