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

Blake, Andrew P., Fixed Interest Rates over Finite Horizons (May 18, 2012). Bank of England Working Paper No. 454, Available at SSRN: https://ssrn.com/abstract=2063201 or http://dx.doi.org/10.2139/ssrn.2063201

Andrew P. Blake (Contact Author)

Bank of England - CCBS ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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