Forward-Looking Behavior and the Stability of a Conventional Monetary Policy Rule
At the turn of the century, Knut Wicksell proposed a monetary policy rule that has become conventional wisdom: raise interest rates when inflation is above target and vice versa. The authors discover some surprising properties of this rule. When the rule is included in a model in which inflation is driven by the short real rate, the model is unstable. When the rule is combined with a Phillips curve driven by a backward-looking long real rate, the model is unstable. However, when a forward-looking component is added to inflation or the long real rate, the policy stabilizes the rate of inflation. Copyright 1995 by Ohio State University Press.
Volume (Year): 27 (1995)
Issue (Month): 4 (November)
|Contact details of provider:|| Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879|
When requesting a correction, please mention this item's handle: RePEc:mcb:jmoncb:v:27:y:1995:i:4:p:1060-70. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing)or (Christopher F. Baum)
If references are entirely missing, you can add them using this form.