EconPapers    
Economics at your fingertips  
 

Robust Real Rate Rules

Tom Holden

Econometrica, 2024, vol. 92, issue 5, 1521-1551

Abstract: Central banks wish to avoid self‐fulfilling fluctuations. Interest rate rules with a unit response to real rates achieve this under the weakest possible assumptions about the behavior of households and firms. They are robust to household heterogeneity, hand‐to‐mouth consumers, non‐rational household or firm expectations, active fiscal policy, and to any form of intertemporal or nominal‐real links. They are easy to employ in practice, using inflation‐protected bonds to infer real rates. With a time‐varying short‐term inflation target, they can implement an arbitrary inflation path, including optimal policy. This provides a way to translate policy makers' desired path for inflation into one for nominal rates. U.S. Federal Reserve behavior is remarkably close to that predicted by a real rate rule, given the desired inflation path of U.S. monetary policy makers. Real rate rules work thanks to the key role played by the Fisher equation in monetary transmission.

Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://doi.org/10.3982/ECTA21069

Related works:
Working Paper: Robust Real Rate Rules (2024) Downloads
Working Paper: Robust real rate rules (2022) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wly:emetrp:v:92:y:2024:i:5:p:1521-1551

Ordering information: This journal article can be ordered from
https://www.economet ... ordering-back-issues

Access Statistics for this article

Econometrica is currently edited by Guido W. Imbens

More articles in Econometrica from Econometric Society Contact information at EDIRC.
Bibliographic data for series maintained by Wiley Content Delivery ().

 
Page updated 2025-03-30
Handle: RePEc:wly:emetrp:v:92:y:2024:i:5:p:1521-1551