Inflation shocks and interest rate rules

Barbara Annicchiarico () and Alessandro Piergallini ()

Economics Bulletin, 2006, vol. 5, issue 19, pages 1-7

Abstract: Recent empirical evidence by Fair (2002, 2005) and Giordani (2003) shows that a positive inflation shock with the nominal interest rate held constant has contractionary effects. These results cannot be reconciled with the standard ‘New Synthesis’ literature. This paper reconsiders the effects of inflation shocks in a simple New Keynesian framework extended to include wealth effects. It is shown that, following an inflation shock, the decline of output coupled with passive interest rate rules is not puzzling.

Keywords: Inflation Shocks; Interest Rate Rules; Wealth Effects (search for similar items in EconPapers)
JEL-codes: E5 (search for similar items in EconPapers)
Date: 2006-12-12
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