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When Preferences for a Stable Interest Rate Become Self‐Defeating

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  • RAGNA ALSTADHEIM
  • ØISTEIN RØISLAND

Abstract

Monetary policymakers often seem to have preferences for a stable interest rate, in addition to stable inflation and output. In this paper, we investigate the implications of having an interest rate level term in the loss function when the policymaker lacks commitment technology. We show that such preferences may become self‐defeating, in the sense that they generate a less stable interest rate than in the case without preferences for interest rate stability.

Suggested Citation

  • Ragna Alstadheim & Øistein Røisland, 2017. "When Preferences for a Stable Interest Rate Become Self‐Defeating," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 49(2-3), pages 393-415, March.
    • Handle: RePEc:wly:jmoncb:v:49:y:2017:i:2-3:p:393-415
    DOI: 10.1111/jmcb.12383
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    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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