Interest rate pegs and the reversal puzzle: On the role of anticipation
Rafael Gerke,
Sebastian Giesen and
Daniel Kienzler
No 50/2020, Discussion Papers from Deutsche Bundesbank
Abstract:
We revisit the reversal puzzle: A counterintuitive contraction of inflation in response to an interest rate peg. We show that it is intimately related to the degree of agents' anticipation. If agents perfectly anticipate the peg, reversals occur depending on the duration of the peg. If they do not anticipate the peg, reversals are absent. In the case of imperfect anticipation, implemented by a Markov-switching framework, we measure the degree of anticipation by the frequency of the peg regime. Even if the frequency of the peg takes on a value twice as large as empirically observed, the reversal puzzle is absent.
Keywords: Interest rate peg; Reversal puzzle; Regime-switching model (search for similar items in EconPapers)
JEL-codes: E32 E52 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-ore
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdps:502020
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