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Interest Rate Targeting in a Small Open Economy

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Author Info

  • Guillermo Calvo
  • Carlos A. Végh Gramont

Abstract

An important hurdle in analyzing interest rate targeting is that standard models usually lead to price level or inflation rate indeterminacy. This paper develops a simple framework in which such problems do not arise because the bonds whose interest rate is controlled provide liquidity services. This framework is used to examine interest rate targeting in a small open economy under predetermined exchange rates. A permanent increase in the interest rate has no real effects. In contrast, a temporary increase in the interest rate leads to higher consumption and to a current account deficit that worsens over time.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 90/21.

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Length: 32
Date of creation: 01 Mar 1990
Date of revision:
Handle: RePEc:imf:imfwpa:90/21

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Cited by:
  1. Juan Carlos Echeverry, . "Short Run Savings Fluctuations and Export Shocks. Theory and Evidence for Latin-America," Borradores de Economia 048, Banco de la Republica de Colombia.
  2. Juan Carlos Echeverry, 1996. "The Fall in Colombian savings during the 1990s. Theory and evidence," BORRADORES DE ECONOMIA 003593, BANCO DE LA REPÚBLICA.

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