A Monetary Policy Rule using Gravity Models

Guillermo Peña

MPRA Paper from University Library of Munich, Germany

Abstract: Monetary policy, when rules-based, usually follows rules regarding inflation or output, but not always quantity, endemic and financial endogenous rules that minimize the gap between optimal and current rates of inflation and output. This paper proposes a rules-based monetary policy focused on reducing differences between short-term Treasury bill and implicit pure interest rate given by gravity models. Satisfying this rule is highly explanatory for reaching potential GDP growth, and for inflation targets such as the 2%. The results are confirmed with worldwide data. Central Banks could follow this rule, or combinations with other complementary alternatives, when deciding rates and amounts.

Keywords: Pure interest; Policy Rules; Financial Services; Marginal Productivity; Value added (search for similar items in EconPapers)
JEL-codes: D78 E43 E44 E52 E58 (search for similar items in EconPapers)
Date: 2021-02-09
New Economics Papers: this item is included in nep-cba, nep-cwa, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:105967

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