Investment and Interest Rate Policy: A Discrete Time Analysis

28 Pages Posted: 2 Nov 2007

See all articles by Charles T. Carlstrom

Charles T. Carlstrom

Federal Reserve Bank of Cleveland

Timothy S. Fuerst

University of Notre Dame

Date Written: December 2003

Abstract

This paper analyzes the restrictions necessary to ensure that the interest rate policy rule used by the central bank does not introduce local real indeterminacy into the economy. It conducts the analysis in a Calvo-style sticky price model. A key innovation is to add investment spending to the analysis. In this environment, local real indeterminacy is much more likely. In particular, all forward-looking interest rate rules are subject to real indeterminacy.

Keywords: interest rates, monetary policy, central banking

JEL Classification: E4, E5

Suggested Citation

Carlstrom, Charles T. and Fuerst, Timothy S., Investment and Interest Rate Policy: A Discrete Time Analysis (December 2003). FRB of Cleveland Working Paper No. 03-20, Available at SSRN: https://ssrn.com/abstract=1026075 or http://dx.doi.org/10.2139/ssrn.1026075

Charles T. Carlstrom (Contact Author)

Federal Reserve Bank of Cleveland ( email )

PO Box 6387
Cleveland, OH 44101-1387
United States
216-579-2294 (Phone)
216-579-3050 (Fax)

Timothy S. Fuerst

University of Notre Dame ( email )

Notre Dame, IN 46556
United States

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