Economic Structure, Policy Objectives, and Optimal Interest Rate Policy at Low Inflation Rates

Diana Weymark ()

No 310, Vanderbilt University Department of Economics Working Papers from Vanderbilt University Department of Economics

Abstract: In this article, the optimal interest rate rule generated by Svennson's (1997) dynamic model is used to determine the impact that a number of key structural characteristics have on the downward flexibility of interest rates at low rates of inflation. The potential impact of preferences for inflation stability, relative to output stability, on the monetary authority's ability to use expansionary interest rate policy is also considered. Estimates of the model for six countries provide evidence of the quantitative significance of the theoretical results. The empirical results are used to identify which monetary authorities are likely to be the most severely constrained in the event of an economic downturn. The size of the contraction that would be required for the interest rate constraint to bind is estimated for each country in the sample.

Keywords: Interest rate rule; low inflation; monetary policy rule; Taylor rule (search for similar items in EconPapers)
JEL-codes: E52 (search for similar items in EconPapers)
Date: 2003-05
New Economics Papers: this item is included in nep-mac and nep-mon
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http://www.accessecon.com/pubs/VUECON/vu03-w10.pdf First version, 2003 (application/pdf)

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Journal Article: Economic structure, policy objectives, and optimal interest rate policy at low inflation rates (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:van:wpaper:0310

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