How inflationary is an extended period of low interest rates?

Charles Carlstrom, Timothy Fuerst and Matthias Paustian
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Matthias Paustian: https://www.federalreserve.gov/econres/matthias-o-paustian.htm

No 1202, Working Papers (Old Series) from Federal Reserve Bank of Cleveland

Abstract: Recent monetary policy experience suggests a simple test of models of monetary non-neutrality. Suppose the central bank pegs the nominal interest rate below steady state for a reasonably short period of time. Familiar intuition suggests that this should be inflationary. But a monetary model should be rejected if a reasonably short nominal rate peg results in an unreasonably large inflation response. We pursue this simple test in three variants of the familiar dynamic new Keynesian (DNK) model. All of these models fail this test. Further some variants of the model produce inflation reversals where an interest rate peg leads to sharp deflations.

Keywords: Interest rates; Interest rate risk (search for similar items in EconPapers)
Pages: 20 pages
Date: 2012
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedcwp:1202

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DOI: 10.26509/frbc-wp-201202

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