Nominal and Real Interest Rates during an Optimal Disinflation in New Keynesian Models

Marcus Hagedorn

No 352, IEW - Working Papers from Institute for Empirical Research in Economics - University of Zurich

Abstract: Central bankers' conventional wisdom suggests that nominal interest rates should be raised to implement a lower inflation target. In contrast, I show that the standard New Keynesian monetary model predicts that nominal interest rates should be decreased to attain this goal. Real interest rates, however, are virtually unchanged. These results also hold in recent vintages of New Keynesian models with sticky wages, price and wage indexation and habit formation in consumption.

Keywords: Disinflation; Optimal Monetary Policy; Nominal and Real Interest Rates (search for similar items in EconPapers)
JEL-codes: E41 E43 E51 E52 (search for similar items in EconPapers)
Date: 2007-12
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Related works:
Working Paper: Nominal and real interest rates during an optimal disinflation in New Keynesian models (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:zur:iewwpx:352

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