On the Optimality of Interest Rate Smoothing

29 Pages Posted: 20 Jul 2000

See all articles by Sergio T. Rebelo

Sergio T. Rebelo

Northwestern University - Kellogg School of Management; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Danyang Xie

Hong Kong University of Science & Technology (HKUST) - Department of Economics

Date Written: February 1997

Abstract

This paper studies some continuous-time cash-in-advance models in which interest rate smoothing is optimal. We consider both deterministic and stochastic models. In the stochastic case we obtain two results of independent interest: (i) we study what is, to our knowledge, the only version of the neoclassical model under uncertainty that can be solved in closed form in continuous time; and (ii) we show how to characterize the competitive equilibrium of a stochastic continuous time model that cannot be computed by solving a planning problem. We also discuss the scope for monetary policy to improve welfare in an economy with a suboptimal real competitive equilibrium, focusing on the particular example of an economy with externalities.

Suggested Citation

Tavares Rebelo, Sergio and Xie, Danyang, On the Optimality of Interest Rate Smoothing (February 1997). NBER Working Paper No. w5947. Available at SSRN: https://ssrn.com/abstract=225727

Sergio Tavares Rebelo (Contact Author)

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
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847-467-2329 (Phone)
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Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Danyang Xie

Hong Kong University of Science & Technology (HKUST) - Department of Economics ( email )

Clear Water Bay
Kowloon, Hong Kong
China
852-2358-7603 (Phone)
852-2358-2084 (Fax)

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