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Interest Rate Pass-Through, Monetary Policy Rules and Macroeconomic Stability

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In this paper we analyze equilibrium determinacy in a sticky price model in which the pass-through from policy rates to retail interest rates is sluggish and potentially incomplete. In addition, we empirically characterize and compare the interest rate pass-through process in the euro area and the U.S. We find that if the pass-through is incomplete in the long run, the standard Taylor principle is insufficient to guarantee equilibrium determinacy. Our empirical analysis indicates that this result might be particularly relevant for bank-based financial systems as for instance that in the euro area.

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Paper provided by Oesterreichische Nationalbank (Austrian Central Bank) in its series Working Papers with number 118.

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Date of creation: 20 Mar 2007
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Handle: RePEc:onb:oenbwp:118

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Keywords: Interest Rate Pass-Through; Interest Rate Rules; Equilibrium Determinacy; Stability;

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