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The Neutrality of Nominal Rates: How Long is the Long Run?

Author

Listed:
  • João Ritto
  • João Valle e Azevedo
  • Pedro Teles

Abstract

How can inflation be raised in economies such as Japan and the euro area where it has been below the objective for quite some time? We estimate an empirical model aimed at identifying the effects of permanent and temporary monetary shocks for the U.S., Japan, France, the U.K., Germany and the euro area. We find that the permanent monetary shock leads to a permanent rise in nominal rates and inflation. Importantly, the short-run effects of this permanent shock are similar to the long-run effects: inflation responds positively and immediately to a permanent rise in nominal rates, confirming the results in Uribe (2017, 2018). We also reinvestigate the long-run relation between inflation and nominal short interest rates. Using data for 41 developed countries covering the last 50 years, we document a strong, yet below one-for-one relationship between nominal rates and inflation, that tends to be less visible over the more recent period, characterized by inflation targeting at low common levels.

Suggested Citation

  • João Ritto & João Valle e Azevedo & Pedro Teles, 2019. "The Neutrality of Nominal Rates: How Long is the Long Run?," Working Papers w201911, Banco de Portugal, Economics and Research Department.
  • Handle: RePEc:ptu:wpaper:w201911
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    File URL: https://www.bportugal.pt/sites/default/files/anexos/papers/wp201911.pdf
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    References listed on IDEAS

    as
    1. Carlson, John B. & Hoffman, Dennis L. & Keen, Benjamin D. & Rasche, Robert H., 2000. "Results of a study of the stability of cointegrating relations comprised of broad monetary aggregates," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 345-383, October.
    2. Crowder, William J & Hoffman, Dennis L, 1996. "The Long-Run Relationship between Nominal Interest Rates and Inflation: The Fisher Equation Revisited," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(1), pages 102-118, February.
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    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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