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

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

    () (Federal Reserve Bank of Cleveland)

Abstract

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.

Suggested Citation

  • Carlstrom, Charles T & Fuerst, Timothy S & Paustian, Matthias, 2012. "Inflation and output in New Keynesian models with a transient interest rate peg," Working Paper 1234, Federal Reserve Bank of Cleveland.
  • Handle: RePEc:fip:fedcwp:1234
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    Cited by:

    1. Gavin, William T. & Keen, Benjamin D. & Richter, Alexander & Throckmorton, Nathaniel, 2013. "The stimulative effect of forward guidance," Working Papers 2013-38, Federal Reserve Bank of St. Louis, revised 30 Apr 2014.
    2. repec:eee:moneco:v:92:y:2017:i:c:p:47-63 is not listed on IDEAS
    3. Darracq Pariès, Matthieu & Kühl, Michael, 2016. "The optimal conduct of central bank asset purchases," Working Paper Series 1973, European Central Bank.
    4. Rannenberg, Ansgar, 2017. "The effect of fiscal policy and forward guidance with preferences over wealth," Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168070, Verein für Socialpolitik / German Economic Association.
    5. Lindé, Jesper & Smets, Frank & Wouters, Rafael, 2016. "Challenges for Central Banks' Macro Models," CEPR Discussion Papers 11405, C.E.P.R. Discussion Papers.
    6. Carlstrom, Charles T. & Fuerst, Timothy S. & Paustian, Matthias, 2015. "Inflation and output in New Keynesian models with a transient interest rate peg," Journal of Monetary Economics, Elsevier, pages 230-243.
    7. Nakata, Taisuke, 2016. "Optimal fiscal and monetary policy with occasionally binding zero bound constraints," Journal of Economic Dynamics and Control, Elsevier, vol. 73(C), pages 220-240.
    8. Cole, Stephen, 2016. "The limits of central bank forward guidance under learning," MPRA Paper 70862, University Library of Munich, Germany.
    9. Harrison, Richard, 2015. "Estimating the effects of forward guidance in rational expectations models," European Economic Review, Elsevier, vol. 79(C), pages 196-213.
    10. repec:ucp:macann:doi:10.1086/690242 is not listed on IDEAS
    11. Hans Gersbach & Volker Hahn & Yulin Liu, 2015. "Forward Guidance Contracts," CESifo Working Paper Series 5375, CESifo Group Munich.
    12. Charles T. Carlstrom & Timothy S. Fuerst & Matthias Paustian, 2017. "Targeting Long Rates in a Model with Segmented Markets," American Economic Journal: Macroeconomics, American Economic Association, vol. 9(1), pages 205-242, January.
    13. Gauti B. Eggertsson & Vaishali Garga, 2017. "Sticky Prices Versus Sticky Information: Does it Matter for Policy Paradoxes?," NBER Working Papers 23961, National Bureau of Economic Research, Inc.
    14. repec:eee:macchp:v2-2185 is not listed on IDEAS
    15. Kulish, Mariano & Morley, James & Robinson, Tim, 2017. "Estimating DSGE models with zero interest rate policy," Journal of Monetary Economics, Elsevier, vol. 88(C), pages 35-49.
    16. Gerke, Rafael & Giesen, Sebastian & Kienzler, Daniel & Tenhofen, Jörn, 2017. "Interest-rate pegs, central bank asset purchases and the reversal puzzle," Discussion Papers 21/2017, Deutsche Bundesbank.
    17. repec:eee:moneco:v:90:y:2017:i:c:p:176-192 is not listed on IDEAS
    18. Jeffrey R. Campbell & Jonas D. M. Fisher & Alejandro Justiniano & Leonardo Melosi, 2017. "Forward Guidance and Macroeconomic Outcomes since the Financial Crisis," NBER Macroeconomics Annual, University of Chicago Press, vol. 31(1), pages 283-357.
    19. repec:bla:ecinqu:v:55:y:2017:i:4:p:1593-1624 is not listed on IDEAS
    20. Ricardo Reis, 2017. "Comment on "Michelson-Morley, Fisher, and Occam: The Radical Implications of Stable Quiet Inflation at the Zero Bound"," NBER Chapters,in: NBER Macroeconomics Annual 2017, volume 32 National Bureau of Economic Research, Inc.
    21. Cole, Stephen, 2015. "Learning and the effectiveness of central bank forward guidance," MPRA Paper 65207, University Library of Munich, Germany.
    22. Christian Bredemeier & Christoph Kaufmann & Andreas Schabert, 2017. "Interest Rate Spreads and Forward Guidance," Working Paper Series in Economics 96, University of Cologne, Department of Economics.
    23. Holden, Thomas, 2016. "Existence and uniqueness of solutions to dynamic models with occasionally binding constraints," EconStor Preprints 130142, ZBW - German National Library of Economics.

    More about this item

    Keywords

    Time-series analysis; Business cycles;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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