Nominal and Real Interest Rates during an Optimal Disinflation in New Keynesian Models
Abstract
Central bankers' conventional wisdom suggests that nominal interest rates should be raised to implement a lower inflation target. In contrast, I show that the standard New Keynesian monetary model predicts that nominal interest rates should be decreased to attain this goal. Real interest rates, however, are virtually unchanged. These results also hold in recent vintages of New Keynesian models with sticky wages, price and wage indexation and habit formation in consumption.Download Info
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.Bibliographic Info
Paper provided by Institute for Empirical Research in Economics - University of Zurich in its series IEW - Working Papers with number 352.Length:
Date of creation: Dec 2007
Date of revision:
Handle: RePEc:zur:iewwpx:352
Contact details of provider:
Postal: Blümlisalpstrasse 10, CH-8006 Zürich
Phone: +41-1-634 22 05
Fax: +41-1-634 49 07
Email:
Web page: http://www.ubscenter.uzh.ch/
More information through EDIRC
Related research
Keywords: Disinflation; Optimal Monetary Policy; Nominal and Real Interest Rates;Find related papers by JEL classification:
- E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-02-09 (All new papers)
- NEP-CBA-2008-02-09 (Central Banking)
- NEP-MAC-2008-02-09 (Macroeconomics)
- NEP-MON-2008-02-09 (Monetary Economics)
References
References listed on IDEASPlease report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Pierpaolo Benigno & Michael Woodford, 2008.
"Linear-Quadratic Approximation of Optimal Policy Problems,"
Discussion Papers
0809-01, Columbia University, Department of Economics.
- Benigno, Pierpaolo & Woodford, Michael, 2006. "Linear-Quadratic Approximation of Optimal Policy Problems," CEPR Discussion Papers 5964, C.E.P.R. Discussion Papers.
- Pierpaolo Benigno & Michael Woodford, 2006. "Linear-Quadratic Approximation of Optimal Policy Problems," NBER Working Papers 12672, National Bureau of Economic Research, Inc.
- Pierpaolo Benigno & Michael Woodford, 2006. "Linear-quadratic approximation of optimal policy problems," Discussion Papers 0607-02, Columbia University, Department of Economics.
- Erceg, Christopher J. & Levin, Andrew T., 2003.
"Imperfect credibility and inflation persistence,"
Journal of Monetary Economics,
Elsevier, vol. 50(4), pages 915-944, May.
- Christopher J. Erceg & Andrew T. Levin, 2001. "Imperfect credibility and inflation persistence," Finance and Economics Discussion Series 2001-45, Board of Governors of the Federal Reserve System (U.S.).
- Christopher J. Erceg and Andrew T. Levin, 2001. "Imperfect Credibility and Inflation Persistence," Computing in Economics and Finance 2001 19, Society for Computational Economics.
- Barro, Robert J., 1986.
"Reputation in a model of monetary policy with incomplete information,"
Journal of Monetary Economics,
Elsevier, vol. 17(1), pages 3-20, January.
- Robert J. Barro, 1986. "Reputation in a Model of Monetary Policy with Incomplete Information," NBER Working Papers 1794, National Bureau of Economic Research, Inc.
- Richard Clarida & Jordi Gali & Mark Gertler, 1999.
"The Science of Monetary Policy: A New Keynesian Perspective,"
NBER Working Papers
7147, National Bureau of Economic Research, Inc.
- Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
- Clarida, Richard & Galí, Jordi & Gertler, Mark, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," CEPR Discussion Papers 2139, C.E.P.R. Discussion Papers.
- Clarida, R. & Gali, J. & Gertler, M., 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Working Papers 99-13, C.V. Starr Center for Applied Economics, New York University.
- Richard Clarida & Jordi Galí & Mark Gertler, 1997. "The science of monetary policy: A new Keynesian perspective," Economics Working Papers 356, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 1999.
- Fabio Milani, 2005.
"Expectations, Learning and Macroeconomic Persistence,"
Macroeconomics
0510022, EconWPA.
- Milani, Fabio, 2007. "Expectations, learning and macroeconomic persistence," Journal of Monetary Economics, Elsevier, vol. 54(7), pages 2065-2082, October.
- Fabio Milani, 2005. "Expectations, Learning and Macroeconomic Persistence," Working Papers 050608, University of California-Irvine, Department of Economics.
- Julio Rotemberg & Michael Woodford, 1997. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 297-361 National Bureau of Economic Research, Inc.
- Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001.
"Nominal rigidities and the dynamic effects of a shock to monetary policy,"
Proceedings,
Federal Reserve Bank of San Francisco, issue Jun.
- Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
- Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Working Paper 0107, Federal Reserve Bank of Cleveland.
- Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Working Paper Series WP-01-08, Federal Reserve Bank of Chicago.
- Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," NBER Working Papers 8403, National Bureau of Economic Research, Inc.
- Athanasios Orphanides & John C. Williams, 2002.
"Imperfect knowledge, inflation expectations, and monetary policy,"
Working Papers in Applied Economic Theory
2002-04, Federal Reserve Bank of San Francisco.
- Athanasios Orphanides & John Williams, 2004. "Imperfect Knowledge, Inflation Expectations, and Monetary Policy," NBER Chapters, in: The Inflation-Targeting Debate, pages 201-246 National Bureau of Economic Research, Inc.
- Athanasios Orphanides & John C. Williams, 2003. "Imperfect Knowledge, Inflation Expectations, and Monetary Policy," CFS Working Paper Series 2003/40, Center for Financial Studies.
- Athanasios Orphanides & John C. Williams, 2003. "Imperfect Knowledge, Inflation Expectations, and Monetary Policy," NBER Working Papers 9884, National Bureau of Economic Research, Inc.
- Orphanides, Athanasios & Williams, John C., 2003. "Imperfect knowledge, inflation expectations, and monetary policy," CFS Working Paper Series 2003/40, Center for Financial Studies (CFS).
- Athanasios Orphanides & John C. Williams, 2002. "Imperfect knowledge, inflation expectations, and monetary policy," Finance and Economics Discussion Series 2002-27, Board of Governors of the Federal Reserve System (U.S.).
- Bennett T. McCallum, 2005.
"A Monetary Policy Rule for Automatic Prevention of a Liquidity Trap,"
NBER Working Papers
11056, National Bureau of Economic Research, Inc.
- Bennett T. McCallum, 2006. "A Monetary Policy Rule for Automatic Prevention of a Liquidity Trap," NBER Chapters, in: Monetary Policy under Very Low Inflation in the Pacific Rim, NBER-EASE, Volume 15, pages 9-42 National Bureau of Economic Research, Inc.
- Vitor Gaspar & Frank Smets & David Vestin, 2006.
"Adaptive learning, persistence, and optimal monetary policy,"
Working Paper Series
644, European Central Bank.
- Vitor Gaspar & Frank Smets & David Vestin, 2006. "Adaptive Learning, Persistence, and Optimal Monetary Policy," Journal of the European Economic Association, MIT Press, vol. 4(2-3), pages 376-385, 04-05.
- Giorgio Primiceri, 2005. "Why Inflation Rose and Fell: Policymakers' Beliefs and US Postwar Stabilization Policy," NBER Working Papers 11147, National Bureau of Economic Research, Inc.
- Ireland, Peter N., 1995.
"Optimal disinflationary paths,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 19(8), pages 1429-1448, November.
- Peter N. Ireland, 1995. "Optimal disinflationary paths," Working Paper 95-01, Federal Reserve Bank of Richmond.
- Thomas Sargent & Noah Williams & Tao Zha, 2004.
"Shocks and Government Beliefs: The Rise and Fall of American Inflation,"
NBER Working Papers
10764, National Bureau of Economic Research, Inc.
- Thomas Sargent & Noah Williams & Tao Zha, 2006. "Shocks and Government Beliefs: The Rise and Fall of American Inflation," American Economic Review, American Economic Association, vol. 96(4), pages 1193-1224, September.
- Thomas Sargent & Noah Williams & Tao Zha, 2004. "Shocks and government beliefs: the rise and fall of American inflation," Working Paper 2004-22, Federal Reserve Bank of Atlanta.
- Marcus Hagedorn, 2006. "Liquidity, Inflation, and Monetary Policy," 2006 Meeting Papers 677, Society for Economic Dynamics.
- Marc P. Giannoni & Michael Woodford, 2003.
"Optimal Inflation Targeting Rules,"
NBER Working Papers
9939, National Bureau of Economic Research, Inc.
- Marc Giannoni & Michael Woodford, 2004. "Optimal Inflation-Targeting Rules," NBER Chapters, in: The Inflation-Targeting Debate, pages 93-172 National Bureau of Economic Research, Inc.
- Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
- Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
Citations
Lists
This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.Statistics
Access and download statisticsCorrections
When requesting a correction, please mention this item's handle: RePEc:zur:iewwpx:352For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Marita Kieser).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.

