Fixed Interest Rates over Finite Horizons
39 Pages Posted: 21 May 2012
Date Written: May 18, 2012
Abstract
We consider finite horizon conditioning paths for nominal interest rates in New Keynesian monetary policy models. This is done two ways. First, we develop a simple way to use policy interventions in the form of interest rate shocks to achieve the conditioning path and show this yields a unique solution. We then modify this method to generate an infinity of solutions making the model better behaved but effectively indeterminate. Second, we use two-part rules where a specially designed targeting rule generates fixed interest rates endogenously over the initial period before reverting to a more conventional instrument rule. We show that the two approaches are equivalent. We discuss appropriate selection criteria over the resulting equilibria.
Keywords: fixed nominal interest rates, uniqueness, indeterminacy
JEL Classification: C63, E47, E61
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Monetary Policy with Model Uncertainty: Distribution Forecast Targeting
By Lars E. O. Svensson and Noah Williams
-
Monetary Policy with Model Uncertainty: Distribution Forecast Targeting
By Lars E. O. Svensson and Noah Williams
-
Generalizing the Taylor Principle
By Troy Davig and Eric M. Leeper
-
Generalizing the Taylor Principle
By Troy Davig and Eric M. Leeper
-
Optimal Monetary Policy in an Operational Medium-Sized DSGE Model
By Jesper Lindé, Malin Adolfson, ...