Inflation and output in New Keynesian models with a transient interest rate peg

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

No 1234, Working Papers (Old Series) from Federal Reserve Bank of Cleveland

Abstract: Recent monetary policy experience suggests a simple diagnostic for 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 modestly inflationary, and a reasonable model should deliver such a prediction. We pursue this simple diagnostic in several variants of the familiar Dynamic New Keynesian (DNK) model. Some variants of the model produce counterintuitive inflation reversals where the effect of the interest rate peg can switch from highly inflationary to highly deflationary for only modest changes in the length of the interest rate peg. Curiously, this unusual behavior does not arise in a sticky information model of the Phillips curve.

Keywords: time series analysis; Business cycles (search for similar items in EconPapers)
Pages: 30 pages
Date: 2012
New Economics Papers: this item is included in nep-mac and nep-mon
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Citations: View citations in EconPapers (19)

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Related works:
Journal Article: Inflation and output in New Keynesian models with a transient interest rate peg (2015)
Working Paper: Inflation and output in New Keynesian models with a transient interest rate peg (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedcwp:1234

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DOI: 10.26509/frbc-wp-201234

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