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An Interest Rate Peg Might Be Better than You Think

  • Andreas Schabert

    ()

  • Markus Hörmann

Active interest rate policy is frequently recommended based on its merits in reducing macroeconomic volatility and being a simple and transparent policy device. In a standard NewKeynesian model,we show that an even simpler policy, namely an interest rate peg, can be welfare enhancing:The minimum state variable solution and an autoregessive solution under a peg can lead to lower welfare losses than the unique solution under an active interest rate rule. Given that a peg is usually blamed to facilitate endogenous fluctuations, we further show that a peg can be implemented in a way that ensures equilibrium determinacy.

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File URL: http://repec.rwi-essen.de/files/REP_09_115.pdf
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Paper provided by Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen in its series Ruhr Economic Papers with number 0115.

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Length: 15 pages
Date of creation: Jun 2009
Date of revision:
Handle: RePEc:rwi:repape:0115
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