When preferences for a stable interest rate become self-defeating

Ragna Alstadheim () and Øistein Røisland
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Øistein Røisland: Norges Bank (Central Bank of Norway), http://www.norges-bank.no/

No 2016/8, Working Paper from Norges Bank

Abstract: Monetary policy makers often seem to have preferences for a stable interest rate, in addition to stable in?ation and output. In this paper we investigate the implications of having an interest rate level term in the loss function when the policymaker lacks commitment technology. We show that preferences for interest rate stability may lead to equilibrium indeterminacy. But even when determinacy is achieved, such preferences can become self-defeating, in the meaning of generating a less stable interest rate than in the case without preferences for interest rate stability. Aiming to stabilize the real interest rate instead of the nominal rate is more robust, as it always gives determinacy and also tends to give a more stable nominal interest rate than when the policymaker aims to stabilize the nominal rate.

Keywords: Monetary policy; Discretion; Interest rate stability (search for similar items in EconPapers)
JEL-codes: E52 E58 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2016-05-25
New Economics Papers: this item is included in nep-mac, nep-mon and nep-net
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http://www.norges-bank.no/en/Published/Papers/Working-Papers/2016/82016/

Related works:
Journal Article: When Preferences for a Stable Interest Rate Become Self‐Defeating (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:bno:worpap:2016_08

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