Speculative Runs on Interest Rate Pegs - The Frictionless Case

33 Pages Posted: 19 Dec 2012

See all articles by Marco Bassetto

Marco Bassetto

Federal Reserve Bank of Chicago

Christopher Phelan

Federal Reserve Bank of Minneapolis

Date Written: December 17, 2012

Abstract

In this paper we show that interest rate rules lead to multiple equilibria when the central bank faces a limit to its ability to print money, or when private agents are limited in the amount of bonds that can be pledged to the central bank in exchange for money. Some of the equilibria are familiar and common to the environments where limits to money growth are not considered. However, new equilibria emerge, where money growth and inflation are higher. These equilibria involve a run on the central bank's interest target: households borrow as much as possible from the central bank, and the shadow interest rate in the private market is different from the policy target.

Keywords: Speculative Run, Interest Rate Rule, Inflation, Central Bank

JEL Classification: E43, E52

Suggested Citation

Bassetto, Marco and Phelan, Christopher J., Speculative Runs on Interest Rate Pegs - The Frictionless Case (December 17, 2012). FRB of Chicago Working Paper No. 2012-16, Available at SSRN: https://ssrn.com/abstract=2190457 or http://dx.doi.org/10.2139/ssrn.2190457

Marco Bassetto (Contact Author)

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

Christopher J. Phelan

Federal Reserve Bank of Minneapolis ( email )

90 Hennepin Avenue
Minneapolis, MN 55480
United States
612-204-5615 (Phone)

HOME PAGE: http://phelan.mpls.frb.fed.us

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