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Inflation and output in New Keynesian models with a transient interest rate peg

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Author Info

  • Carlstrom, Charles

    ()
    (Federal Reserve Bank of Cleveland)

  • Fuerst, Timothy

    ()
    (Federal Reserve Bank of Cleveland)

  • Paustian, Matthias

    ()
    (Bank of England)

Abstract

Recent monetary policy experience suggests a simple test for models of monetary non-neutrality. Suppose the central bank pegs the nominal interest rate below steady state for a reasonably short period of time. Familiar intuition suggests that this should be inflationary. We pursue this simple test in three variants of the familiar Dynamic New Keynesian (DNK) model. Some variants of the model produce counterintuitive inflation reversals where an interest rate peg leads to sharp deflations.

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Bibliographic Info

Paper provided by Bank of England in its series Bank of England working papers with number 459.

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Length: 27 pages
Date of creation: 20 Jul 2012
Date of revision:
Handle: RePEc:boe:boeewp:0459

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Keywords: Fixed interest rates; New Keynesian model; zero lower bound;

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References

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  1. R. Anton Braun & Lena Mareen Körber, 2011. "New Keynesian dynamics in a low interest rate environment," Working Paper 2011-10, Federal Reserve Bank of Atlanta.
  2. Andrew Levin & David López-Salido & Edward Nelson & Yack Yun, 2010. "Limitations on the Effectiveness of Forward Guidance at the Zero Lower Bound," International Journal of Central Banking, International Journal of Central Banking, vol. 6(1), pages 143-189, March.
  3. Lawrence J. Christiano & Martin Eichenbaum & Sergio Rebelo, 2010. "When is the government spending multiplier large?," CQER Working Paper 2010-01, Federal Reserve Bank of Atlanta.
  4. Frank Smets & Rafael Wouters, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," American Economic Review, American Economic Association, vol. 97(3), pages 586-606, June.
  5. Blake, Andrew, 2012. "Fixed interest rates over finite horizons," Bank of England working papers 454, Bank of England.
  6. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
  7. Stephanie Schmitt-Grohe & Martin Uribe, 2005. "Optimal Fiscal and Monetary Policy in a Medium-Scale Macroeconomic Model: Expanded Version," NBER Working Papers 11417, National Bureau of Economic Research, Inc.
  8. Laséen, Stefan & Svensson, Lars E.O., 2011. "Anticipated Alternative Policy-Rate Paths in Policy Simulations," Working Paper Series 248, Sveriges Riksbank (Central Bank of Sweden).
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. The Macroeconomic Effects of Forward Guidance
    by Blog Author in Liberty Street Economics on 2013-02-25 12:00:00
  2. The Macroeconomic Effects of Forward Guidance
    by Barry Ritholtz in The Big Picture on 2013-02-26 11:00:36

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