An interest rate peg, inflation and output

Keith MacKinnon and John Smithin

Journal of Macroeconomics, 1993, vol. 15, issue 4, 769-785

Abstract: This paper models a "credit economy" in which the only exchange media are bank liabilities created as a by-product of the demand for finance by firms. Monetary policy involves the "pegging" of interest rates and, since there is no "natural rate" of interest in the model, is non-neutral. If the authorities peg the real rate, a Phillips curve type relationship emerges. Lower settings of this rate lead to both higher output and inflation. This restores something of the Wicksellian notion of the "cumulative process," but in a context of variable equilibrium output. If nominal rates are pegged, then lower settings will lead to both lower inflation (contrary to Wick-sellian tradition) and output.

Date: 1993
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:15:y:1993:i:4:p:769-785

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