Download This PaperInflation and Output in New Keynesian Models with a Transient Interest Rate Peg
27 Pages Posted: 21 Jul 2012
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Inflation and Output in New Keynesian Models with a Transient Interest Rate Peg
Date Written: July 20, 2012
Abstract
Recent monetary policy experience suggests a simple test for models of monetary non-neutrality. Suppose the central bank pegs the nominal interest rate below steady state for a reasonably short period of time. Familiar intuition suggests that this should be inflationary. We pursue this simple test in three variants of the familiar Dynamic New Keynesian (DNK) model. Some variants of the model produce counterintuitive inflation reversals where an interest rate peg leads to sharp deflations.
Keywords: Fixed interest rates, New Keynesian model, zero lower bound
JEL Classification: E32
Suggested Citation: Suggested Citation
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