Nominal Interest Rate Pegging Under Alternative Expectations Hypotheses

International Monetary Fund

No 1988/094, IMF Working Papers from International Monetary Fund

Abstract: Nominal interest rate pegging leads to instability in an IS-LM model with a vertical long-run Phillips curve and backward-looking inflation expectations. However, it does not lead to instability in several large multicountry econometric models, apparently primarily because these models have nonvertical long-run Phillips curves. Nominal interest rate pegging leads to price level and output indeterminacy in a model with staggered contracts and rational expectations. However, when a class of money supply rules with interest rate smoothing is introduced, and interest rate pegging is viewed as the limit of interest rate smoothing, the price level and output are determinate.

Keywords: WP; interest rate; price level; inflation rate; rate of inflation; expectations formation equation; excess supply; steady-state inflation rates; price level indeterminacy; inflation expectation; wealth evolution equation; difference equation; price level determinacy; aggregate demand; price level in period t; inflation-rate trajectory; Inflation; Monetary base; Short term interest rates; Rational expectations; Real interest rates (search for similar items in EconPapers)
Pages: 54
Date: 1988-01-01
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