Interest Rate Targeting in a Small Open Economy
AbstractAn 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 InfoPaper provided by International Monetary Fund in its series IMF Working Papers with number 90/21.
Date of creation: 01 Mar 1990
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