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Economic Structure, Policy Objectives, and Optimal Interest Rate Policy at Low Inflation Rates

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  • Diana N. Weymark

    () (Department of Economics, Vanderbilt University)

Abstract

In this article, the optimal interest rate rule generated by Svennson's (1997) dynamic model is used to determine the impact that a number of key structural characteristics have on the downward flexibility of interest rates at low rates of inflation. The potential impact of preferences for inflation stability, relative to output stability, on the monetary authority's ability to use expansionary interest rate policy is also considered. Estimates of the model for six countries provide evidence of the quantitative significance of the theoretical results. The empirical results are used to identify which monetary authorities are likely to be the most severely constrained in the event of an economic downturn. The size of the contraction that would be required for the interest rate constraint to bind is estimated for each country in the sample.

Suggested Citation

  • Diana N. Weymark, 2003. "Economic Structure, Policy Objectives, and Optimal Interest Rate Policy at Low Inflation Rates," Vanderbilt University Department of Economics Working Papers 0310, Vanderbilt University Department of Economics.
  • Handle: RePEc:van:wpaper:0310
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    References listed on IDEAS

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    1. Svensson, Lars E. O., 1997. "Inflation forecast targeting: Implementing and monitoring inflation targets," European Economic Review, Elsevier, vol. 41(6), pages 1111-1146, June.
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    3. Julio J. Rotemberg & Michael Woodford, 1999. "Interest Rate Rules in an Estimated Sticky Price Model," NBER Chapters,in: Monetary Policy Rules, pages 57-126 National Bureau of Economic Research, Inc.
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    Cited by:

    1. Jim Engle-Warnick & Nurlan Turdaliev, 2005. "An Experimental Test Of Taylor-Type Rules With Inexperienced Central Bankers," Macroeconomics 0511022, EconWPA.

    More about this item

    Keywords

    Interest rate rule; low inflation; monetary policy rule; Taylor rule;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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