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Economic Structure, Policy Objectives, and Optimal Interest Rate Policy at Low Inflation Rates

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  • Diana N. Weymark

    () (Department of Economics, Vanderbilt University)

Abstract

In this article, the optimal interest rate rule generated by Svennson's (1997) dynamic model is used to determine the impact that a number of key structural characteristics have on the downward flexibility of interest rates at low rates of inflation. The potential impact of preferences for inflation stability, relative to output stability, on the monetary authority's ability to use expansionary interest rate policy is also considered. Estimates of the model for six countries provide evidence of the quantitative significance of the theoretical results. The empirical results are used to identify which monetary authorities are likely to be the most severely constrained in the event of an economic downturn. The size of the contraction that would be required for the interest rate constraint to bind is estimated for each country in the sample.

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File URL: http://www.accessecon.com/pubs/VUECON/vu03-w10.pdf
File Function: First version, 2003
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Bibliographic Info

Paper provided by Vanderbilt University Department of Economics in its series Vanderbilt University Department of Economics Working Papers with number 0310.

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Date of creation: May 2003
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Handle: RePEc:van:wpaper:0310

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Web page: http://www.vanderbilt.edu/econ/wparchive/index.html

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Keywords: Interest rate rule; low inflation; monetary policy rule; Taylor rule;

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  1. Svensson, Lars E. O., 2000. "Open-economy inflation targeting," Journal of International Economics, Elsevier, vol. 50(1), pages 155-183, February.
  2. Athanasios Orphanides & Volker Wieland, 1999. "Inflation zone targetting," Working Paper Series 8, European Central Bank.
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Cited by:
  1. Jim Engle-Warnick & Nurlan Turdaliev, 2006. "An Experimental Test of Taylor-Type Rules with Inexperienced Central Bankers," CIRANO Working Papers 2006s-05, CIRANO.

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