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Inflation and output in New Keynesian models with a transient interest rate peg

Author

Listed:
  • Carlstrom, Charles

    () (Federal Reserve Bank of Cleveland)

  • Fuerst, Timothy

    () (Federal Reserve Bank of Cleveland)

  • Paustian, Matthias

    () (Bank of England)

Abstract

Recent monetary policy experience suggests a simple test for models of monetary non-neutrality. Suppose the central bank pegs the nominal interest rate below steady state for a reasonably short period of time. Familiar intuition suggests that this should be inflationary. We pursue this simple test in three variants of the familiar Dynamic New Keynesian (DNK) model. Some variants of the model produce counterintuitive inflation reversals where an interest rate peg leads to sharp deflations.

Suggested Citation

  • Carlstrom, Charles & Fuerst, Timothy & Paustian, Matthias, 2012. "Inflation and output in New Keynesian models with a transient interest rate peg," Bank of England working papers 459, Bank of England.
  • Handle: RePEc:boe:boeewp:0459
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    References listed on IDEAS

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    More about this item

    Keywords

    Fixed interest rates; New Keynesian model; zero lower bound;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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