Nominal Interest Rate Pegging Under Alternative Expectations Hypotheses

54 Pages Posted: 15 Feb 2006

Date Written: October 21, 1988

Abstract

Nominal interest rate pegging leads to instability in an IS-LM model with a vertical long-run Phillips curve and backward-looking inflation expectations. However, it does not lead to instability in several large multicountry econometric models, apparently primarily because these models have nonvertical long-run Phillips curves. Nominal interest rate pegging leads to price level and output indeterminacy in a model with staggered contracts and rational expectations. However, when a class of money supply rules with interest rate smoothing is introduced, and interest rate pegging is viewed as the limit of interest rate smoothing, the price level and output are determinate.

JEL Classification: 3110, 4300

Suggested Citation

Gagnon, Joseph and Henderson, Dale W., Nominal Interest Rate Pegging Under Alternative Expectations Hypotheses (October 21, 1988). IMF Working Paper No. 88/94, Available at SSRN: https://ssrn.com/abstract=885066

Joseph Gagnon (Contact Author)

Peterson Institute ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

HOME PAGE: http://www.piie.com

Dale W. Henderson

Federal Reserve Board ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States
202-452-2343 (Phone)
202-736-5638 (Fax)

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