The Neutrality of Nominal Rates: How Long is the Long Run?

João Valle e Azevedo and Pedro Teles

Working Papers from Banco de Portugal, Economics and Research Department

Abstract: How can inflation be raised in economies such as Japan and the euro area where it has been below the objective for quite some time? We estimate an empirical model aimed at identifying the effects of permanent and temporary monetary shocks for the U.S., Japan, France, the U.K., Germany and the euro area. We find that the permanent monetary shock leads to a permanent rise in nominal rates and inflation. Importantly, the short-run effects of this permanent shock are similar to the long-run effects: inflation responds positively and immediately to a permanent rise in nominal rates, confirming the results in Uribe (2017, 2018). We also reinvestigate the long-run relation between inflation and nominal short interest rates. Using data for 41 developed countries covering the last 50 years, we document a strong, yet below one-for-one relationship between nominal rates and inflation, that tends to be less visible over the more recent period, characterized by inflation targeting at low common levels.

JEL-codes: E31 E32 E52 E58 (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: THE NEUTRALITY OF NOMINAL RATES: HOW LONG IS THE LONG RUN? (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:ptu:wpaper:w201911

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