Nominal and real interest rates during an optimal disinflation in New Keynesian models

Marcus Hagedorn ()
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Marcus Hagedorn: Institut for Empirical Research (IEW), University of Zurich, Blümlisalpstrasse 10, CH-8006 Zürich, Switzerland., http://www.iew.uzh.ch/index_en.html

No 878, Working Paper Series from European Central Bank

Abstract: Central bankers’ conventional wisdom suggests that nominal interest rates should be raised to implement a lower inflation target. In contrast, I show that the standard New Keynesian monetary model predicts that nominal interest rates should be decreased to attain this goal. Real interest rates, however, are virtually unchanged. These results also hold in recent vintages of New Keynesian models with sticky wages, price and wage indexation and habit formation in consumption. JEL Classification:

New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: Written 2008-03
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Persistent link: http://EconPapers.repec.org/RePEc:ecb:ecbwps:20080878

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