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

  • Carlstrom, Charles T
  • Fuerst, Timothy S
  • Paustian, Matthias

    ()

    (Federal Reserve Bank of Cleveland)

Recent monetary policy experience suggests a simple diagnostic 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 modestly inflationary, and a reasonable model should deliver such a prediction. We pursue this simple diagnostic in several variants of the familiar Dynamic New Keynesian (DNK) model. Some variants of the model produce counterintuitive inflation reversals where the effect of the interest rate peg can switch from highly inflationary to highly deflationary for only modest changes in the length of the interest rate peg. Curiously, this unusual behavior does not arise in a sticky information model of the Phillips curve.

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Paper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 1234.

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Length: 30 pages
Date of creation: 2012
Date of revision:
Handle: RePEc:fip:fedcwp:1234
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  18. Charles T. Carlstrom & Timothy S. Fuerst & Matthias Paustian, 2014. "Fiscal Multipliers under an Interest Rate Peg of Deterministic versus Stochastic Duration," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(6), pages 1293-1312, 09.
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