Limits on Interest Rate Rules in the IS Model

29 Pages Posted: 17 Nov 2012

See all articles by Robert G. King

Robert G. King

Boston University - Department of Economics; Federal Reserve Bank of Richmond - Research Department; National Bureau of Economic Research (NBER)

William Kerr

Harvard University - Entrepreneurial Management Unit

Multiple version iconThere are 2 versions of this paper

Date Written: 1996

Abstract

There are a few limits on interest rate rules in the textbook sticky price macroeconomic model. A central bank can even use a 'pure' rule that sets the interest rate arbitrarily. However, modern consumption and investment theory suggests that expectations of future output enter the IS schedule. With this modification, a pure interest rate rule is either infeasible or undesirable. Yet, interest rate rules that target the price level or the inflation rate can be feasible.

Suggested Citation

King, Robert G. and Kerr, William R., Limits on Interest Rate Rules in the IS Model (1996). FRB Richmond Economic Quarterly, vol. 82, no. 2, Spring 1996, pp. 47-75. Available at SSRN: https://ssrn.com/abstract=2125909

Robert G. King (Contact Author)

Boston University - Department of Economics ( email )

270 Bay State Road
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617-353-5941 (Phone)

Federal Reserve Bank of Richmond - Research Department

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National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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William R. Kerr

Harvard University - Entrepreneurial Management Unit ( email )

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Morgan 270C
Boston, MA 02163
United States

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