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Inflation shocks and interest rate rules

  • Barbara Annicchiarico


    (Department of Economics, University of Rome ‘Tor Vergata''')

  • Alessandro Piergallini


    (Centre for Financial & Management Studies (CeFiMS), SOAS, University of London)

Recent empirical evidence by Fair (2002, 2005) and Giordani (2003) shows that a positive inflation shock with the nominal interest rate held constant has contractionary effects. These results cannot be reconciled with the standard ‘New Synthesis' literature. This paper reconsiders the effects of inflation shocks in a simple New Keynesian framework extended to include wealth effects. It is shown that, following an inflation shock, the decline of output coupled with passive interest rate rules is not puzzling.

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Article provided by AccessEcon in its journal Economics Bulletin.

Volume (Year): 5 (2006)
Issue (Month): 19 ()
Pages: 1-7

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Handle: RePEc:ebl:ecbull:eb-06e50009
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  1. Richard Clarida & Jordi Gali & Mark Gertler, 2002. "A Simple Framework for International Monetary Policy Analysis," NBER Working Papers 8870, National Bureau of Economic Research, Inc.
  2. Bennett T. McCallum & Edward Nelson, . "An Optimizing IS-LM Specification for Monetary Policy and Business Cycle Analysis," GSIA Working Papers 1997-71, Carnegie Mellon University, Tepper School of Business.
  3. Jean-Pascal Benassy, 2005. "Interest Rate Rules, Price Determinacy and the Value of Money in a non Ricardian World," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(3), pages 651-667, July.
  4. Jean-Pascal Benassy, 2000. "Price Level Determinacy under a Pure Interest Rate Peg," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(1), pages 194-211, January.
  5. Fair Ray C, 2002. "On Modeling the Effects of Inflation Shocks," The B.E. Journal of Macroeconomics, De Gruyter, vol. 2(1), pages 1-21, April.
  6. Schmitt-Grohe, Stephanie & Uribe, Martin, 2000. "Price level determinacy and monetary policy under a balanced-budget requirement," Journal of Monetary Economics, Elsevier, vol. 45(1), pages 211-246, February.
  7. Ray C. Fair, 2001. "Estimates of the Effectiveness of Monetary Policy," Cowles Foundation Discussion Papers 1298, Cowles Foundation for Research in Economics, Yale University, revised Jun 2003.
  8. Alessandro Piergallini, 2006. "Real Balance Effects and Monetary Policy," Economic Inquiry, Western Economic Association International, vol. 44(3), pages 497-511, July.
  9. Giordani Paolo, 2003. "On Modeling the Effects of Inflation Shocks: Comments and Some Further Evidence," The B.E. Journal of Macroeconomics, De Gruyter, vol. 3(1), pages 1-15, January.
  10. Bennett T. McCallum, 2001. "Monetary policy analysis in models without money," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 145-164.
  11. Jordi Gali & J. David Lopez-Salido & Javier Valles, 2004. "Rule-of-Thumb Consumers and the Design of Interest Rate Rules," NBER Working Papers 10392, National Bureau of Economic Research, Inc.
  12. 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.
  13. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  14. Ascari, Guido & Rankin, Neil, 2007. "Perpetual youth and endogenous labor supply: A problem and a possible solution," Journal of Macroeconomics, Elsevier, vol. 29(4), pages 708-723, December.
  15. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-11, July.
  16. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
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