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Nominal and real interest rates during an optimal disinflation in New Keynesian models

  • Hagedorn, Marcus

Central bankers’ conventional wisdom suggests that nominal interest rates should be raised to implement a lower inflation target. In contrast, I show that the standard New Keynesian monetary model predicts that nominal interest rates should be decreased to attain this goal. Real interest rates, however, are virtually unchanged. These results also hold in recent vintages of New Keynesian models with sticky wages, price and wage indexation and habit formation in consumption. JEL Classification: E41, E43, E51, E52

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Paper provided by European Central Bank in its series Working Paper Series with number 0878.

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Date of creation: Mar 2008
Date of revision:
Handle: RePEc:ecb:ecbwps:20080878
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  18. Marcus Hagedorn, 2006. "Liquidity, Inflation, and Monetary Policy," 2006 Meeting Papers 677, Society for Economic Dynamics.
  19. Giorgio Primiceri, 2005. "Why Inflation Rose and Fell: Policymakers' Beliefs and US Postwar Stabilization Policy," NBER Working Papers 11147, National Bureau of Economic Research, Inc.
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