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Interest Rate Feedback Rules in an Open Economy with Forward Looking Inflation

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  • Leith, Campbell B
  • Wren-Lewis, Simon

Abstract

With the adoption of an explicit inflation target in the UK, there has been renewed interest in the properties of alternative feedback rules for interest rates based on an inflation target. In this paper we compare the stabilisation properties of the two forms of feedback rule that have been used most frequently in the literature and in policy disculssion, Specifically, we examine the relative merits of relating excess inflation to the level of real interest rates, or the change in nominal interest arates in the face of various types of shock. We explain why the relative performance of the rules is dependent upon the nature of the shock considered and whether or not excess inflation is defined in terms of consumer or output price inflation.

Suggested Citation

  • Leith, Campbell B & Wren-Lewis, Simon, 1997. "Interest Rate Feedback Rules in an Open Economy with Forward Looking Inflation," Discussion Papers 9704, Exeter University, Department of Economics.
  • Handle: RePEc:exe:wpaper:9704
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    Cited by:

    1. Tatiana Kirsanova & Campbell Leith & Simon Wren-Lewis, 2006. "Should Central Banks Target Consumer Prices or the Exchange Rate?," Economic Journal, Royal Economic Society, vol. 116(512), pages 208-231, June.
    2. Darby, Julia & Ireland, Jonathan & Leith, Campbell & Wren-Lewis, Simon, 1998. "COMPACT: a rational expectations, intertemporal model of the United Kingdom economy," Economic Modelling, Elsevier, vol. 16(1), pages 1-52, January.
    3. Bas van Aarle & Harry Garretsen & Florence Huart, 2004. "Monetary and Fiscal Policy Rules in the EMU," German Economic Review, Verein für Socialpolitik, vol. 5(4), pages 407-434, November.
    4. Andrew P. Blake, 2004. "Analytic Derivatives for Linear Rational Expectations Models," Computational Economics, Springer;Society for Computational Economics, vol. 24(1), pages 77-96, August.

    More about this item

    Keywords

    Interest rate rules; inflation;

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General

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