How inflationary is an extended period of low interest rates?
AbstractRecent monetary policy experience suggests a simple test of 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. But a monetary model should be rejected if a reasonably short nominal rate peg results in an unreasonably large inflation response. We pursue this simple test in three variants of the familiar dynamic new Keynesian (DNK) model. All of these models fail this test. Further some variants of the model produce inflation reversals where an interest rate peg leads to sharp deflations.
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Bibliographic InfoPaper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 1202.
Date of creation: 2012
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-02-01 (All new papers)
- NEP-CBA-2012-02-01 (Central Banking)
- NEP-MAC-2012-02-01 (Macroeconomics)
- NEP-MON-2012-02-01 (Monetary Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Blake, Andrew, 2012. "Fixed interest rates over finite horizons," Bank of England working papers 454, Bank of England.
- Robert Lucas & Mike Golosov, 2004.
"Menu Costs and Phillips Curves,"
2004 Meeting Papers
144, Society for Economic Dynamics.
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