Impacts of Monetary Policy Rates on Interest and Inflation Rates

47 Pages Posted: 19 Dec 2017

See all articles by Ali Anari

Ali Anari

Texas A&M University - Mays Business School

James W. Kolari

Texas A&M University - Department of Finance

Date Written: December 14, 2017

Abstract

This paper extends previous research on how monetary policy rates impact interest and inflation rates. We develop and apply a system model comprised of joint Fisher-Wicksell effects augmented with the federal funds rate. Theoretical relationships between ex ante and ex post coefficients are specified, dynamic relationships of the model are investigated, and steady state policy rate elasticities of inflation and interest rates are derived. Employing U.S. rate series and state space econometric methods, we estimate time-varying coefficients of the augmented system model. Policy rate elasticities of inflation rates provide insights into the effectiveness of using policy rates to control inflation and influence interest rates. These and other results suggest that dual Fisher and Wicksell effects are important channels of monetary policy rate transmission to interest and inflation rates.

Keywords: interest rates, inflation, monetary policy

JEL Classification: C30, E40, E52

Suggested Citation

Anari, Ali and Kolari, James W., Impacts of Monetary Policy Rates on Interest and Inflation Rates (December 14, 2017). Available at SSRN: https://ssrn.com/abstract=3088133 or http://dx.doi.org/10.2139/ssrn.3088133

Ali Anari (Contact Author)

Texas A&M University - Mays Business School ( email )

Wehner 401Q, MS 4353
College Station, TX 77843-4218
United States
979-845-2094 (Phone)
979-845-0460 (Fax)

James W. Kolari

Texas A&M University - Department of Finance ( email )

MS-4218
Department of Finance
College Station, TX TX 77843-4218
United States
979-845-4803 (Phone)
979-845-3884 (Fax)

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