IDEAS home Printed from https://ideas.repec.org/p/bru/bruedp/06-20.html
   My bibliography  Save this paper

The Perverse Response of Interest Rates

Author

Listed:
  • Virginie Boinet
  • Christopher Martin

Abstract

We argue that an increase in aggregate demand can lead to a reduction in the interest rate.This apparently perverse optimal response of interest rates can occur when the Phillips curve is non-linear. In that case, an increase in aggregate demand tends to increase inflation and output but also to change the weight on inflation in the optimal monetary policy rule. Although the first two effects tend to increase interest rates, the latter effect can imply lower interest rates. If this effect dominates, interest rates can fall.

Suggested Citation

  • Virginie Boinet & Christopher Martin, 2006. "The Perverse Response of Interest Rates," Economics and Finance Discussion Papers 06-20, Economics and Finance Section, School of Social Sciences, Brunel University.
  • Handle: RePEc:bru:bruedp:06-20
    as

    Download full text from publisher

    File URL: http://www.brunel.ac.uk/329/efwps/0620.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Douglas Laxton & Guy Meredith & David Rose, 1995. "Asymmetric Effects of Economic Activity on Inflation: Evidence and Policy Implications," IMF Staff Papers, Palgrave Macmillan, vol. 42(2), pages 344-374, June.
    2. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
    3. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
    4. Andrew J. Filardo, 1998. "New evidence on the output cost of fighting inflation," Economic Review, Federal Reserve Bank of Kansas City, issue Q III.
    5. Joseph Stiglitz, 1997. "Reflections on the Natural Rate Hypothesis," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 3-10, Winter.
    6. 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.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Boinet, Virginie & Martin, Christopher, 2010. "The optimal neglect of inflation: An alternative interpretation of UK monetary policy during the "Great Moderation"," Journal of Macroeconomics, Elsevier, vol. 32(4), pages 982-992, December.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bru:bruedp:06-20. 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: (John.Hunter). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.