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Interest rate pegs and the reversal puzzle: On the role of anticipation

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  • Gerke, Rafael
  • Giesen, Sebastian
  • Kienzler, Daniel

Abstract

We revisit the reversal puzzle: A counterintuitive contraction of inflation in response to an interest rate peg. We show that it is intimately related to the degree of agents' anticipation. If agents perfectly anticipate the peg, reversals occur depending on the duration of the peg. If they do not anticipate the peg, reversals are absent. In the case of imperfect anticipation, implemented by a Markov-switching framework, we measure the degree of anticipation by the frequency of the peg regime. Even if the frequency of the peg takes on a value twice as large as empirically observed, the reversal puzzle is absent.

Suggested Citation

  • Gerke, Rafael & Giesen, Sebastian & Kienzler, Daniel, 2020. "Interest rate pegs and the reversal puzzle: On the role of anticipation," Discussion Papers 50/2020, Deutsche Bundesbank.
    • Handle: RePEc:zbw:bubdps:502020
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    References listed on IDEAS

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    Cited by:

    1. Dobrew, Michael & Gerke, Rafael & Giesen, Sebastian & Röttger, Joost, 2023. "Make-up strategies with incomplete markets and bounded rationality," Discussion Papers 01/2023, Deutsche Bundesbank.
    2. Gerke, Rafael & Kienzler, Daniel & Scheer, Alexander, 2022. "On the macroeconomic effects of reinvestments in asset purchase programmes," Discussion Papers 47/2022, Deutsche Bundesbank.

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    More about this item

    Keywords

    Interest rate peg; Reversal puzzle; Regime-switching model;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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