On the Optimality of Interest Rate Smoothing

Sergio Rebelo () and Danyang Xie

No 5947, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper studies some continuous-time cash-in-advance models in which interest rate smoothing is optimal. We consider both deterministic and stochastic models. In the stochastic case we obtain two results of independent interest: (i) we study what is, to our knowledge, the only version of the neoclassical model under uncertainty that can be solved in closed form in continuous time; and (ii) we show how to characterize the competitive equilibrium of a stochastic continuous time model that cannot be computed by solving a planning problem. We also discuss the scope for monetary policy to improve welfare in an economy with a suboptimal real competitive equilibrium, focusing on the particular example of an economy with externalities.

JEL-codes: E31 E43 (search for similar items in EconPapers)
Date: 1997-02
Note: EFG ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Published as Journal of Monetary Economics, Vol. 43, no. 2 (April 1999): 263-282.

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Related works:
Journal Article: On the optimality of interest rate smoothing (1999)
Working Paper: On the Optimality of Interest Rate Smoothing (1996)
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