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

Listed author(s):
  • Carlstrom, Charles

    ()

    (Federal Reserve Bank of Cleveland)

  • Fuerst, Timothy

    ()

    (Federal Reserve Bank of Cleveland)

  • Paustian, Matthias

    ()

    (Bank of England)

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.

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Paper provided by Bank of England in its series Bank of England working papers with number 459.

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Length: 27 pages
Date of creation: 20 Jul 2012
Handle: RePEc:boe:boeewp:0459
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