Interest rate pegs in New Keynesian models
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The conventional policy perspective is that lowering the interest rate increases output and inflation in the short run, while maintaining inflation at a higher level requires a higher interest rate in the long run. In contrast, it has been argued that a Neo‐Fisherian policy of setting an interest‐rate peg at a fixed higher level will increase the inflation rate. We show that adaptive learning argues against the Neo‐Fisherian approach. Pegging the interest rate at a higher level will induce instability and most likely lead to falling inflation and output over time. Eventually, this would precipitate a change of policy.
Evans , G W & McGough , B 2018 , ' Interest rate pegs in New Keynesian models ' , Journal of Money, Credit and Banking , vol. 50 , no. 5 , pp. 939-965 . https://doi.org/10.1111/jmcb.12523
Journal of Money, Credit and Banking
© 2018 The Ohio State University. This work has been made available online in accordance with the publisher’s policies. This is the author created, accepted version manuscript following peer review and may differ slightly from the final published version. The final published version of this work is available at: https://doi.org/10.1111/jmcb.12523
DescriptionFinancial support from National Science Foundation Grant No. SES-1559209 is gratefully acknowledged.
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